More than 600,000 families relying on a state salary will get a bitter taste of the coming “public-sector recession” this week, as John Swinney sets out his draft budget amid the worst funding figures in 10 years of devolution.

With a quarter of the Scottish workforce employed in the public sector, the finance secretary’s spending figures for 2010-11 will be closely watched by an army of teachers, social workers, NHS staff, and civil servants.

But the numbers will also be critical to the businesses who rely on the public sector’s spending power, as well as a general public used to a decade of investment in state services.

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And although next year’s £30 billion budget will be £500 million down because of a Westminster drive to cut costs, it is only a first installment.

With Labour and Tories anxious to curb the record public debt run up in the recession, the next five to 10 years will be very tough. All sides accept cuts are coming; the big questions are when, where and how deep?

On Thursday, Alex Salmond suggested the answer to the last question was very deep indeed, as he predicted “a public-sector recession in Scotland” caused by Westminster spending policies.

Swinney sent out the same message yesterday, saying the economic climate required him to “streamline” the public sector and “step up the pace” on councils and quangos sharing services.

A leaked civil service minute recently flagged up a 5% cut next year. Other studies have estimated a real-terms cut of 8.5%, or £2.5bn, by 2013-14. North of the Border, where the big public sector has been seen as an bulwark against job losses in the private sector, the problem will be particularly acute. More than 620,000 people work in the public sector -- around 45% in councils and 25% in the NHS. With pay accounting for half of public spending, salaries and jobs are obvious targets.

Around 70% of council spending is statutorily protected: police and fire boards, education and social work. Ministers have also signaled they won’t cut free care for the elderly, or end the freeze on council tax.

That leaves other council services, such as libraries, museums, leisure centres, trading standards and cleansing to bear the brunt of the cuts.

The Sunday Herald understands Swinney last month asked councils to shoulder a third of a new £300m shortfall in budgets, in addition to an agreed third of the £500m cuts from Westminster. Council leaders refused, indicating tension ahead.

Outside councils, unions suspect universities also face big cuts. Dave Moxham, STUC deputy general secretary, said pay freezes look inevitable: “It’s one of the few things that can save money immediately.”

Reinforcing the mood of national crisis, Swinney last week asked the leaders of the other Holyrood parties to work with him in a joint strategic review of public spending.

In particular, he wants a cross-party alliance to pressurise the Treasury to let him borrow from future budgets. The finance secretary has already brought forward, or “accelerated”, £350m of capital spending from the 2010-11 budget to help the building industry.

To fill the resulting hole, he now wants to borrow the same again from the 2011-12 budget. However when he accelerated 2010-11 cash, Swinney was working with a single spending review period.

Borrowing from 2011-12 means getting an advance from the next three-year spending review, which won’t happen until after the general election. The Treasury is unimpressed.

The other parties also suspect Swinney of trying to bind them in to his spending plans to avoid a repeat of last year’s defeat on the Budget bill. Jeremy Purvis, the LibDem finance spokesman, said Swinney was now looking for help to spend money “on the never-never”.

He said: “That’s just outrageous. Trying to bounce other parties is not really the way to get the parliament together on an issue like this.”

Andy Kerr, for Labour, said he would work with Swinney, but the SNP needed to focus on jobs and services, not “picking fights with Westminster”. He added: “I’m not sure they are up to this challenge, considering how they have handled the budget so far.”

Swinney’s draft budget comes as the debate at Westminster on public spending hots up ahead of Alistair Darling’s pre-Budget report in November.

On Tuesday, the chancellor admitted the UK government would have to “cut costs” and “shift resources to the front line”. The downbeat realism, after months of Gordon Brown doggedly promising continued investment, was a watershed, but it won’t help Labour.

The same day, Cameron was able to say his party had been “straight” with voters all along.

“We’ve taken the bold step of saying to the British public very clearly, with a Conservative government, public spending will be cut. Not reduced in growth, not frozen, but cut,” he said.

Brown got it in the neck again on Friday as he met union leaders at Chequers ahead of this week’s TUC conference in Liverpool.

Government plans to halve the annual budget deficit -- expected to be £175bn this year -- over the next four years must not involve mass redundancies, Brown was warned. Unfortunately for thousands of families, it will not be that simple.

Governments across the world have got themselves into a position of financial weakness as a result of the current economic crisis. Lower revenues than expected and higher expenditures, in order to help provide a government-led economic stimulus, have left many governments heavily in the red. The result will be that after the current stimulus packages fade away, towards the end of next year, most governments will need to start to drag their finances back towards balance.

For Scotland, the Centre for Public Policy in Regions (CPPR) estimates that this could result in an 8.5% real-terms cut in the Holyrood government’s budget by 2013-14, equivalent to a

£2.5 billion reduction in spending power. While this period will see the worst of the adjustment, post 2013-14 public-sector growth is likely to remain weak for some time, much lower than in the early years of devolution.

What will this mean for the services Scots rely upon? The best answer is that will depend on what we, collectively, decide to do. At present, the choice over where cuts might fall is largely absent from public, or indeed political, debate. But the choices are so important, and of such a scale, that this needs to change.

For example, there has been discussion in Whitehall of protection for spending on the NHS, schools, international development and defence. However, every time a concession is made to one public service it simply acts to ratchet up the cuts needed in those areas not protected.

Calculations by CPPR estimate that if health avoided any real-terms cuts then the -8.5% overall figure would rise to -13% for the non-health budget. If education were also protected then the cut to non-health, non-education budgets would stand at around 17%.

Those who think that spending on transport or the environment or law and order are important might want to have a wider debate on whether health and education should be protected.

In England, the head of the Audit Commission has suggested that health and education should not be excluded from the search for savings for the simple reason that these areas have seen huge growth in funding over the last decade and by implication may have more scope for savings.

In Ireland, a special task force set up to find savings there identified health and education as two of the top three areas for proposed savings and staff cuts.

Public-sector pay and jobs is a crucial area in all this. Wages account for around half of the total Scottish government’s budget. The lower any future wage increase, the less of a cut needs to be found elsewhere and in turn fewer job cuts will need to be made. This trade-off between the level of pay and the level of jobs will be a very important decision, but so far there has been little discussion of the merits of each case.

Another important but difficult issue is this: Can we make cuts without reducing the quality of service? Take education, for example. Per pupil spend in Scottish schools is about 20-30% higher than in England, but educational attainment levels are about the same. Why is this? Could we cut the spend in Scotland and get the same results? More time needs to be spent understanding why this is the case and whether savings can be made.


What it means for you

  John McLaren Centre for Public Policy in Regions

One of the biggest problems in relation to these issues is that it takes time to understand where the most efficient savings might be made, and yet little progress has been made in Scotland in recent months in considering such issues. Most politicians seem content to avoid the tough decisions for now but that will simply lead to last-minute, under-informed decisions.

Perhaps we should copy the Irish example and set up an ­independent group to examine expenditure programmes and make ­recommendations for reductions. That at least would ensure action and possibly allow for greater cross-party consensus.

Another problem that needs to be addressed is how to prioritise different services. While comparing education across different systems can lead to savings through identifying and copying best practice, this isn’t much use across services. It doesn’t tell us how much health a community wants in comparison to the level of education it wants.

At a turning point like this, the wishes of an informed public would seem to be desirable. Rather than allowing decisions to be led by politicians, who are heavily lobbied by professional organisations, it might be better to bring in the public more. This would allow a greater understanding of the need for cuts to be made, along with an expression of where they would like to see the cuts happen.

The current debate on healthcare in the USA might look a little brutal to us, but at least there is a genuine engagement between politicians and the public over what system they want to emerge and, despite all the spin, there will no doubt end up being a greater understanding of the issues at hand.

Perhaps it is time for Scotland to get closer to the service users to understand their preferences.

At First Minister’s Questions last week, Alex Salmond highlighted the medium-term implications of budget cuts in Scotland and called on the government not to be silent but to broadcast this message to the Scottish people “so that informed choices can be made”. Now is the time to start that engagement.