Experts issue warning as Scottish Government in £1.5bn Budget black hole

The Fraser of Allander Institute at the University of Strathclyde has insisted Finance Secretary Shona Robison will need to find major savings when she delivers the Budget speech on Tuesday.

Experts have suggested income tax will not be enough to fill the gap.

In a briefing to journalists Prof Mairi Spowage - director of the institute - said the fiscal outlook beyond 2024/25 will largely depend on funding decisions by the UK Government.

The Scottish Government receives a block grant from Westminster, which former finance secretary Kate Forbes said this week is “still the most critical element” of the Budget.

She highlighted how a drop in spending power in England would be “catastrophic” for Scotland as what is spent south of the Border “is what generates funding for Scotland” – known as the Barnett Formula.

Robison criticised the grant set by the Conservatives during First Minister’s Questions this week. She highlighted how the Scottish Government was to receive just £10.8 million for health, enough for just five hours capacity in the NHS.

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The Strathclyde University economists said increasing income tax for high earners – which some reports have said is set to be brought in - would have a limited effect.

In its annual Budget report, the institute said the funding gap is made up of roughly £800 million in resource (day-to-day) spending and £700 million in capital spending.

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “This large funding gap will mean difficult choices for the Scottish Government on what to prioritise.

“In a devolved context, this gap cannot be allowed to manifest in practice, so steps will need to be taken to address it.

Kate Forbes said the block grant from Westminster is still the most critical part of the Scottish Budget (Image: PA)

“Of course, the Deputy First Minister [DFM] may choose to use powers over income tax to raise more revenue to plug this gap, but it is unlikely that this would be sufficient in isolation.

“Significant spending cuts are also likely to be required – the DFM has the unenviable task of choosing where the axe will fall.”

Spowage said this year’s Budget was always going to be “tough”, and policies like the Scottish Child Payment had constrained spending on other areas.

Forbes highlighted how Office for Budget Responsibility (OBR) chair Richard Hughes told MSPs on Holyrood's Finance and Public Administration Committee that the Chancellor opted to cut two taxes in his autumn statement “rather than to try to protect the real spending power of public services”.

She stressed how this would have a knock-on effect on Scotland, saying: “It’s not based on need, it’s based on Tory choices.”

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Hughes later spoke about the impact of the UK’s rising national debt saying: “Debt service costs now come to more than £100bn a year, which means that, if debt servicing were a UK Government department, it would be the second largest after the national health service.”

Forbes said this high figure was the cost of the Tories’ “economic ineptitude”.

Robison has said the Chancellor’s recent autumn statement was the “worst-case scenario” for Scotland and left her little room for manoeuvre in setting the Scottish Budget.

The increase in resource spending is largely down to public sector pay awards which are significantly higher than was budgeted for.

Fully compensating local authorities for the decision to freeze council tax is expected to add £300 million to the bill.

Income tax revenues have performed better than expected and there has been further funding from the UK Government, but the FAI said this has been outweighed by the spending pressures.

Prof Spowage said the Government could have started thinking earlier in the year how to save money, rather than arriving at “this very difficult position in the few weeks before the Budget”.

She added: “One would question whether the best way to spend limited resources in this constrained fiscal environment is to fund a council tax freeze.”

Joao Sousa, deputy director of the institute, said a new tax band for high earners would be “nowhere near sufficient” to balance the books.

He said: “There has been a huge amount of speculation on whether new income tax bands will be introduced to help with the Government’s funding position.

“In our report, we analyse many of the options that have been discussed.

“It is important – always – to remember how much these measures will raise when likely behavioural responses are taken into account.

“For example, a new 44p rate above £75,000 will raise around £40 million – not insignificant of course, but nowhere near sufficient to balance the books.”