The Scottish government is facing a tough choice between “repaying, taxing and waiting” for more money and powers in London, a major economic think tank has warned.
The Institute for Fiscal Studies (IFS) said expensive spending policies, disappointing tax revenues and inflationary pressures had left the Nicola Sturgeon administration in a financial position.
The SNP-Green government predicted last year that its spending would exceed its revenue to leave a £ 3.5bn funding gap in 2026/27, equivalent to 8% of its budget.
The equivalent of £ 640 per person in Scotland, joining it in a single move could add 6 to 7p to all types of income tax.
SNP Finance Secretary Kate Forbes is due to publish on Tuesday the medium-term financial strategy and review of Scottish Government resource spending set out daily spending plans for the next four years.
The Scottish Tax Commission, the independent oversight body of Holyroood’s budget, will publish its five-year economic and fiscal forecasts for Scotland on the same day.
In an information document for next week, the IFS said the Scottish government “should bring the ax to certain areas of spending, plan higher levels of taxation, or ignore the current problem, with the ‘hope for additional funding or requesting powers from the UK government to alleviate the tax situation’.
He added: “Therefore, some very difficult decisions will have to be communicated next week, unless the Scottish government decides to place its hopes that the UK government will increase spending across the UK by around 40 billion. free, a scenario that seems unlikely. ”
Scottish Conservatives said the Scottish government’s incompetence was responsible for a “huge black hole” in public finances.
The IFS said bridging the gap would be tricky at best, given Holyrood’s limited savings and lending powers under its Treasury framework agreement.
However, the next four years “will be far from the best of times,” making it even more difficult.
The think tank said some of the problems were with the Scottish government, including its decision to increase spending on social security, while others were out of its control, such as slower economic growth in relation to UK, the pandemic and rising inflation.
The latter meant that their plans to increase public sector wages by 3 to 4% may not be enough, as they would leave workers facing cuts in real terms.
His observation paper said: “Since it is not generally permissible to apply for loans to finance day-to-day spending, you will have to choose a combination of exclusion, taxes and hope for the UK government to end. [up] their spending plans “.
But betting on the UK to cover the Scottish Government’s spending gap was “risky” as the Treasury would have to increase its spending by more than £ 40bn to generate an additional £ 3.5bn for Holyrood.
The think tank suggested that Ms Sturgeon’s most likely path would be to delay the tax increase or cuts for political convenience, with the independence campaign a factor.
He concluded: “In the end, tough elections on Scottish taxes and spending will have to be faced in the coming years. Political considerations – including those related to the Scottish government’s desire for another independence referendum – will no doubt have , a role in making these elections clear next week or not.
“Announcing them could be delayed, but they can’t be avoided for a long time.”
Co-author David Phillips, associate director of the IFS, said: “A number of costly spending commitments in addition to the underlying spending pressures are causing the Scottish government to face a multimillion-dollar budget deficit over the next four years. current forecasts.
“Unable to apply for a loan to finance day-to-day spending, except in limited circumstances, next week’s Scottish spending review could see the announcement of quite significant tax increases or spending cuts in lower priority services, and even the abandonment of some political commitments., to balance the budget.
“Alternatively, and perhaps most likely, the Scottish government could put its hopes in additional funding from the UK government.
“This is indeed the bet made in the 2021 SNP election manifesto and, in fact, a significant boost to funding was announced. But repeating the bet may not be as successful this time around.
“While more funding surcharges could be on the way, it seems unlikely that the UK government will increase its plans just enough to allow the Scottish government to pay all its political priorities without some difficult tax and / or election. or other spending areas. ‘
Tory MSP Liz Smith said: “These forecasts are a condemnation of the SNP government’s mismanagement and will be of great concern to both Scottish taxpayers and the general public.
“There is already a big black hole in the Scottish government’s budget and now economists are telling us that it has just gotten a lot bigger thanks to Nicola Sturgeon’s nonsense. The financial deficit is the product of a government’s incompetence. SNP that has wasted taxpayers’ money on a whole series of failed public sector projects, of which the ferry failure is the first on the list.
“Writing has been on the wall for many months. The Scottish economy is not performing as well as it should, mainly because the SNP has failed to address productivity issues and long-term labor market imbalances. These are having a detrimental effect on both tax revenue and investment, and it’s the fault of Nicol Sturgeon. ”
Labor MSP Daniel Johnson said: “The IFS document exposes the price of the SNP’s economic failure.
“Fifteen years ago, Scottish wages were growing faster than the UK average; now they are lagging behind.
“It is clear that the review of spending, scheduled for next week, will explain the high cost that all Scots will have to pay for nationalists to prioritize the Constitution over the economy.
“This will be counted in lost jobs, utility cuts and few will be able to forgive them to the SNP.”
Scottish Liberal Democrat funding spokesman John Ferry added: “Scotland is getting a good deal as part of the UK’s pooling and sharing agreements and Nicola Sturgeon is happy to cash the checks.
“Unfortunately, the management of the Scottish economy by the SNP has left a gap in the heart of our public finances. The fact is that Scots are faced with paying more and getting less with the SNP.
“Almost every economic intervention the SNP has attempted has exploded in their faces and Scottish ministers are becoming synonymous with managerial incompetence.
“It’s time to replace this SNP / Green government with one that has a clear plan to increase productivity, encourage investment and create highly skilled and well-paid jobs. That’s how to close the gap.”
A spokesman for Forbes said: “The IFS is right to highlight the challenges posed by rising inflation and uncertain funding decisions by the UK government, which could drastically reduce Scotland’s budget by one. easy way.
“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 overcome the pandemic, in the face of rising costs.
“Our budget is already worth less this year due to inflation, and without the debt levers available to other governments, the Scottish government is facing difficult spending decisions.
“Expenditure review is not a budget, it will expose how, within these limited means and powers, we will focus our resources to help with the cost of living crisis, to address child poverty, which only “It is being aggravated by the actions of the United Kingdom government: to grow our economy and support our public sector.”