Scottish ministers will have to make billions of pounds of cuts to pay for costly new policies being planned at the same time as a sharp fall in UK government funding, economists have warned.

Some key public services, including local government, face real terms cuts of up to 17% over the next four years to protect frontline services such as health, schools and policing, according to a forecast from the Fraser of Allander Institute, a thinktank at Strathclyde University.

The FAI predicts that the Scottish government’s direct funding from the Treasury could fall by as much as £1.6bn in real terms by 2020-21, as the UK government continues to pursue its deficit reduction plans after the EU referendum.

But Scottish ministers face further budgetary pressures from their own ambitious spending pledges and the weaker performance of Scotland’s economy relative to the UK overall – a situation likely to worsen during the economic slowdown caused by the vote for Brexit.



Nicola Sturgeon, the first minister, confirmed last week that she will press ahead with plans to increase education spending by £500m and double free childcare provision. She also wants to protect police funding, free university tuition and more generous welfare spending.

Unveiling further plans to spend up to £500m to support business borrowing, Sturgeon confirmed she plans to cut air passenger duty rates by 50% or about £127m from 2018. She has also rejected opposition calls to raise cash by increasing income tax for higher earners.

The chancellor, Philip Hammond, is likely to unveil cuts of at least 3% to 4% in UK funding in the autumn statement in November, but these could be as high as 6%. It means that unprotected public services in Scotland could see annual cuts of 2.6% to 4.5% from next year.

“Delivering on these [cuts] will require a tough re-prioritisation in other areas,” said Prof Graeme Roy, the FAI’s director and a former economic adviser to Alex Salmond, the previous first minister.

“As an area of unprotected spend, the grant to local government could be cut by around £1bn on a like-for-like basis by 2020-21. Without radical reform, cuts to services are likely to become increasingly apparent in the years ahead, providing a controversial backdrop for next year’s local elections.”

Scotland’s economy was already weaker than the UK’s before the EU referendum, due largely to the impact of falling oil prices on North Sea industries. The FAI forecasts that Scottish growth will be 0.9% this year and 0.5% next year compared to 1.6% and 0.7% at the UK level.

That will further complicate the Scottish government’s spending options because it is likely to reduce the tax generated in Scotland, just as Holyrood takes control over Scottish income tax revenues. And, Roy added, it will force opposition parties to explain what they would cut or which taxes they would raise to balance the budget.

As a result of the fiscal framework deal signed by the Scottish and UK governments in February to provide some protections to Holyrood spending, ministers in Edinburgh will need to absorb any fall in devolved taxes if the Scottish economy underperforms.

“Brexit uncertainty, a weakening UK fiscal position, ongoing UK welfare reform, and a fragile Scottish economy, means that the devolution of powers over tax and social security could not have come at a more challenging time,” Roy added.

“The combination of a weakening in the outlook for the UK public finances impacting on Scotland’s block grant, a challenging outlook for devolved revenues, and a series of significant spending priorities – particularly in health and the planned transformation in childcare – will require a substantial re-prioritisation of spending and reform of public services in Scotland.”