When George Osborne proposed in the Budget that the new minimum wage would rise to £9 an hour in 2020, he was shifting the responsibility for improving the position of the low paid to the employer, allowing him to justify reducing tax credits. The rise in the minimum wage and the tax threshold should be welcomed as a bold proposal and positive step to improve the position of those on low pay, and for that the Chancellor deserves some credit.

However, the consequence of this budget is that the employer most hit by this proposal will be the Government itself, which employs around 20 per cent of the workforce directly and a further 20 per cent indirectly. When one looks at the figures there is a considerable additional cost from the rise in the minimum wage to all government departments and devolved governments including the Scottish Government, which will put the UK budget increasing at odds with the anti-austerity policy of the Scottish Government.

In Scotland, out of the 2.6 million employed, 550,000 are directly employed by the public sector. The Scottish Government policy is for public sector workers to be paid at least the living wage which is higher than the current minimum wage but lower than the new proposed minimum wage. It is estimated by the Scottish Government that 20 per cent of all employees are paid the living wage or less, so if this ratio is consistent in the public sector, then at least 100,000 direct public sector employees will have salary increases over the next four years to bring them up the new proposed minimum wage of £9. This will have a major impact on the Scottish public sector salary budget.

There is a subtle but significant difference between the minimum wage and the living wage. The minimum wage is calculated as £6.50 per hour, whilst the living wage (outside London) is based on an annualised salary which, on a working week of 37 hours, equates to £7.85 per hour. However, many in the public sector are paid on a contracted hours basis above 37 hours per week, to include overtime and other benefits, typically 42 hours a week. An increase of the living wage to £9 for those on 37 hours would be approximately £2,200 per year (a 15 per cent increase in salary) but for those on 42 hours the increase would be £4,500 (a 30 per cent increase).

In addition to those at present on the living wage, many employees, particularly those with a salary band close to the living wage, would expect their salaries to reflect their relative position to the living wage. So an increase in minimum wage to £9 an hour will put pressure on salaries throughout the public sector system to increase. Furthermore, the public sector buys services from private contractors for services, who will also try to pass on these additional indirect salary costs of the increased minimum wage. What begins as a straightforward policy starts to grow arms and legs.

What does this all mean financially? Well, the direct salary increases to the public sector could cost the Scottish Government an additional £300 million to £400m a year. However, once the additional impact of adjusting salary bands and costs from indirect employees contracted to the public sector are factored in, the total increased cost of this policy to the Scottish Government could be more than £1 billion.

The Scottish Budget is around £38bn a year, so the impact of these additional costs is about 2.6 per cent. In normal times, this might be less of a problem to absorb. However, the increase comes at a time when George Osborne has set a policy to eliminate the public sector deficit. To achieve this he is looking to reduce a further £20bn from UK departmental annual expenditure in addition to the £17bn he hopes to reduce in welfare costs. If Scotland were to shoulder its share of this based on its population we might see a further £1.5bn a year being cut in Scottish public expenditure. Already next year will see a fall of just over £100m to the Scottish grant as a start to this process but this is a drop in the ocean to the cuts that will come in the following and subsequent years.

The UK Budget proposals with the increase in minimum wage over the next four years will increase annual costs to the Scottish Government by perhaps as much £1bn, over the same period the annual grant due to the austerity program could be cut by £1.5bn, so somewhere around £2.5bn of savings each year will need to be found in the Scottish budget to balance the numbers. This is around seven per cent of the current Scottish budget, a much bigger problem to address.

The Scottish Government has already set out public sector areas, such as health, that it will not cut expenditure on so any cuts will fall disproportionally on unprotected departments. In addition, the Scottish Government has a policy of no compulsory public sector redundancies. For most public sector departments, salaries are by far the largest cost. So in the next four years the Scottish Government will be required to find its share of the £20bn UK departmental savings when its largest cost, salaries, is going to increase significantly due to the rise in minimum wage and under a policy of no compulsory redundancies. It is difficult to see how this works.

It doesn’t work and something will have to change as there is a complete conflict between the Chancellor's ambition to remove the deficit and the Scottish Government's policy on anti austerity and public sector employment.

There are three obvious options: first, the UK Government will have to implement a longer term strategy in eliminating the deficit that will substantially reduce the need to cut spending so dramatically but, having set out a promise to eliminate the deficit, the Conservatives will be loathe not to deliver it ahead of the next UK General Election; secondly, the Scottish Government will have to make cuts beyond its current policies to protect budgets and public sector jobs, which will be blamed on Westminster and used to increase anti-English sentiments; thirdly, tax and borrowing powers are passed to Scotland that will allow it to tackle the situation in a different way.

There is an opportunity to implement the third option but it is remote. It would need a radically changed Scotland Bill to the one going through Parliament and so far there has been little appetite from most MPs to do much beyond the limited proposals in the Smith Commission. However, as the effects of decisions such as changing the minimum wage work through and the real impact of spending cuts starts to be felt in the delivery of public services in Scotland, pressure will build for more radical change so that Scottish Government policy isn’t so impacted by decisions made by the UK Chancellor.

Ben Thomson is an entrepreneur who buys and builds businesses in Scotland. He is chairman of five organisations and a director of three others.