The Scottish government is facing a clear choice between “ax, taxation and hope” for more money and power than London, warned a leading economic think tank.
The Institute for Fiscal Research (IFS) said expensive spending policies, insufficient tax revenues and inflationary pressures had put the Nicola Sturgeon administration in financial trouble.
The SNP-Green government predicted last year that its spending would exceed its revenue to leave a funding gap of £ 3.5 billion by 2026/27, equivalent to 8% of its budget.
Equivalent to £ 640 for every person in Scotland, overcoming it in one go can add 6 to 7 pence to all income tax rates.
SNP Finance Secretary Kate Forbes is due to publish the Scottish government’s medium-term financial strategy and overview of resource spending on Tuesday, outlining daily spending plans for the next four years.
The Scottish Fiscal Commission, Holyroood’s independent budgetary oversight body, will publish its five-year economic and fiscal forecasts for Scotland on the same day.
In a briefing next week, IFS said the Scottish government “will either have to take the ax in certain areas of spending, plan higher levels of taxation – or ignore the issue for now, hoping for additional funding instead.” or the empowerment of the UK government to alleviate the fiscal situation. ”
It added: “Therefore, some very difficult decisions will have to be announced next week, unless the Scottish Government decides instead to pin its hopes on the UK Government to increase spending for the whole of the UK by around £ 40 billion – a scenario that seems unlikely.
The Scottish Tories have said that the incompetence of the Scottish Government is responsible for a “huge black hole” in public finances.
IFS said bridging the gap would be difficult in the best of times, given Holyrood’s limited lending and savings powers under the fiscal framework agreement with the Treasury.
However, the next four years “will be far from the best of times”, which makes it even more difficult.
The think tank said some of the problems were the Scottish government’s own solutions, including its decision to increase social security spending, while others were largely beyond its control, such as slower economic growth than the UK, a pandemic and rising inflation.
The latter meant that his plans to increase public sector wages by 3 to 4% may not be enough, as it would put workers facing real layoffs.
The monitoring document states: “As he is generally not allowed to borrow to finance day-to-day expenses, he will have to choose some combination of waiver, taxation and hope that the UK government will excel. [up] its cost plans. ”
But UK banking to fill the Scottish government’s spending gap was “risky” as the Treasury would have to increase spending by more than £ 40 billion to generate an additional £ 3.5 billion for Holyrood.
The think tank suggests that Ms. Sturgeon’s most likely course will be to postpone raising taxes or lowering taxes for political convenience, with the independence campaign being a factor.
It concludes: “Ultimately, we will have to face difficult choices over Scottish taxes and spending over the next few years. Political considerations – including those related to the Scottish Government’s desire for a new referendum on independence – will undoubtedly play a role in whether these elections will be clarified next week or not.
“Their announcement may be delayed, but they cannot be avoided for long.”
Co-author David Phillips, associate director at IFS, said: “A series of costly commitments in addition to major spending pressures means the Scottish government is facing a multibillion-dollar budget deficit over the next four years, according to current estimates.
“As it cannot borrow to finance day-to-day expenses, except in some limited circumstances, a review of Scottish spending next week may see the announcement of quite serious tax increases or cuts in lower-priority services and even abandoning some political commitments to balance the budget.
“Alternatively, and perhaps most likely, the Scottish Government could pin its hopes on further funding from the UK government.
“This is, in fact, the gambling made in the SNP’s pre-election manifesto in 2021, and indeed a significant increase in funding has been announced since then. But repeating gambling may not be as successful this time.
While further replenishment of funding may be on the way, it seems unlikely that the UK government will complement its plans with something like this to allow the Scottish Government to pay for all its political priorities without some difficult choices about taxes and / or or other areas of expenditure ‘.
Tory MSP Liz Smith said: “These estimates are a horrific indictment of the poor governance of the SNP government and will be of deep concern to both Scottish taxpayers and the general public.
“There is already a huge black hole in the Scottish government’s budget, and now economists are telling us that it has just become much bigger thanks to Nicola Sturgeon’s extravagance. The financial shortfall is a product of the incompetence of the SNP government, which has squandered taxpayers’ money on a range of failed public sector projects, of which the ferry fiasco has topped the long list.
“It has been written on the wall for many months. The Scottish economy is not doing as well as it should, mainly because the SNP has failed to address long-term productivity problems and labor market imbalances. They have a detrimental effect on both tax revenue and investment, and Nicole Sturgeon is to blame.
Daniel Johnson, a member of the Labor Party, said: “The IFS report reveals the cost of the SNP’s economic failure.
“Fifteen years ago, wages in Scotland were growing faster than the UK average – now they are lagging behind.
“It is clear that the review of spending next week will show the heavy price that all Scots will have to pay for nationalists who give priority to the constitution over the economy.
“This will count in lost jobs, cuts in public services and few will be able to forgive the SNP for that.”
Scottish Liberal Democrats’ financial spokesman John Ferry added: “Scotland is getting a good deal as part of the UK’s unification and sharing agreements, and Nicola Sturgeon is too happy to cash the checks.
“Unfortunately, the management of the Scottish economy by the SNP has left a gaping hole in the heart of our public finances. The fact is that Scots are faced with paying more and receiving less on the SNP.
“Almost every economic intervention that the SNP has tried has exploded in their faces, and Scottish ministers have become a byword for managerial incompetence.
“It is time to replace this SNP / green government with one that has a clear plan to increase productivity, encourage investment and create high-skilled, well-paid jobs. Here’s how to bridge the gap. ”
A spokeswoman for Forbes said: “IFS is right to highlight the challenges posed by rising inflation and uncertain funding solutions for the UK government, which could drastically reduce Scotland’s budget.
“While the chancellor offered some support to households, he did nothing to support the public sector and the public sector workers who helped the country through the pandemic in the face of rising costs.
“Our budget is already costing less this year as a result of inflation, and – without the leverage available to other governments – the Scottish government is facing challenging spending decisions.
“Expenditure review is not a budget, but it will show how, within these limited resources and powers, we will focus our resources to help with the cost of living crisis, to tackle child poverty – which is only exacerbated by action by the UK government – to develop our economy and support our public sector. ”
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