Tax or slash - Scots could face tax hikes or cuts to services to tackle £3.5bn deficit

Finance secretary Kate Forbes is facing the choice of either raising taxes or cutting funding for services to reverse a projected multi-billion pound deficit in Scotland’s finances, the Institute for Fiscal Studies (IFS) has warned.

Scots have been warned to brace for potential announcements of higher taxes or major projects being ditched by financial experts ahead of the publication of the Scottish Government’s Resource Spending Review.

This review will set out the SNP/Green coalition’s day-to-day spending over the next four years and is due to be published on Tuesday.

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Critics have said the warning demonstrates the SNP’s failure to manage the economy competently and have blamed Nicola Sturgeon’s leadership.

Ministers have previously warned of a £3.5bn projected hole in their budget by 2026/27 caused by poor income tax receipts, expensive policy commitments and rocketing inflation.

The IFS has warned such a hole, worth around £640 per person in Scotland, will leave Ms Forbes facing “very tough decisions” on whether to cut key services or raise taxes.

Due to income tax being partially devolved to Holyrood, lower earners in Scotland have paid less tax than in England, with higher earners paying more than if they lived in England.

Finance Secretary Kate Forbes has been told she faces a multi-billion pound shortfall in the coming years.

The Resource Spending Review will set out the Scottish Government’s plans for the next four years of public service spending, but the numbers will have a significant degree of uncertainty.

This is because the Scottish Government’s budget is dependent on UK Government spending plans and any cut to taxes or spending plans by Downing Street would have knock-on negative effects for the Scottish exchequer.

It also leaves larger spending projects such as the doubled Scottish Child Payment and other expensive commitments dependent on increased spending by the UK Government to bridge the £3.5bn gap in Scottish finances.

David Phillips, associate director at the IFS, said forecasts showed these expensive spending commitments, twinned with rocketing inflation, would result in a “multi-billion budget shortfall”.

He said: “Because it cannot borrow to fund day-to-day spending except in some limited circumstances, next week’s Scottish Spending Review could see the announcement of pretty hefty tax rises or cuts to spending on lower priority services, and even the abandoning of some policy commitments, to bring the budget into balance.”

The finance expert said the “gamble” of the SNP’s 2021 manifesto was for more UK Government funding, which did then materialise. However, he warned repeating the gamble may not be successful.

Mr Phillips said: “While further funding top-ups could be on the way, it seems unlikely that the UK Government will top up its plans by anything like enough to allow the Scottish Government to pay for all of its policy priorities without some hard choices on tax and/or other areas of spending.”

Opposition parties said the report was an example of SNP incompetence with the economy.

Liz Smith, the Scottish Conservative finance spokesperson, said it was a “damning indictment” of the SNP’s “economic mismanagement” and “deeply concerning”.

She said: “There is already a huge black hole in the Scottish Government’s budget and now economists are telling us that it has just got a whole lot bigger thanks to the profligacy of Nicola Sturgeon. The financial shortfall is the product of incompetence from an SNP Government which has squandered taxpayers’ money on a whole range of failed public sector projects, of which the ferries fiasco is top of the long list.

“The writing has been on the wall for many months now. The Scottish economy is not performing as well as it should be, mainly because the SNP has failed to address long-term productivity problems and imbalances in the labour market. These are having detrimental effects on both tax revenue and investment, and the blame for this lies firmly at Nicola Sturgeon’s door.”

Daniel Johnson, the Labour finance spokesperson, said the warning “lays bare the price of SNP economic failure”.

He said: “Fifteen years ago, Scottish salaries were growing more quickly than the UK average. Now they lag behind.

"It is clear that the spending review, due next week, will spell out the heavy cost all Scots will have to pay for nationalists prioritising constitution over the economy.

"This will be counted in lost jobs, cuts to public services and few will be able to forgive the SNP them for it."

Scottish Liberal Democrat finance spokesperson John Ferry said Ms Sturgeon was “only too happy” to “cash the cheques” from being part of the union, and that Scots faced “paying more and getting less” under the SNP.

He said: “Unfortunately the SNP's management of the Scottish economy has left a gaping hole at the heart of our public finances. The fact is Scots are faced with paying more and getting less under the SNP.

"Almost every economic intervention the SNP have attempted has blown up in their faces and Scottish ministers are becoming a byword for managerial incompetence.”

A spokesperson for Ms Forbes: “The IFS are right to highlight the challenges caused by rising inflation and by uncertain UK Government funding decisions, which can dramatically reduce Scotland’s budget at the drop of a hat.

“While the Chancellor offered some support to households, he has done nothing to support the public sector and public sector workers, who have helped the country through the pandemic, in the face of rising costs. Our budget is already worth less this year as a result of inflation and – without the borrowing levers available to other governments – the Scottish Government faces challenging spending decisions.

“The Spending Review is not a budget, but it will set out how, within those limited means and powers, we will focus our resources to help with the cost-of-l iving crisis, to tackle child poverty – which is only being exacerbated by the actions of the UK Government – to grow our economy and to support our public sector.”

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