THE next Scottish government will face a £2billion dilemma over planned cuts to its budget, newly devolved benefits and income tax bills for the better off, a leading think tank has warned.

In a new report, IPPR Scotland set out the scale of tax changes that would required to offset policies being pursued by the Conservatives.

It concluded that it was unrealistic to expect tax rises to cancel out such deep cuts to public spending, which is equivalent to the Scottish Government's total annual spending on higher education.

However, it said changes to income tax in Scotland from next year could have a significant impact.

The independent, progressive think tank's report, titled 'New Powers, New Scotland?' reopened the debate between the parties on how best to use the parliament's new powers.

Scottish Labour said it would not copy George Osborne's plan to cut income tax for the better off and challenged the SNP to match its pledge.

Scots Tory MSP Murdo Fraser dismissed Labour's tax promises - which also include a 1p rise in income tax for all workers - as "a complete shambles".

The SNP, meanwhile, said it would set out tax plans to boost the economy and counter "ideological Tory cuts to social security" closer to the election.

IPPR Scotland highlighted the impact of three pressures on the Scottish budget.

It said benefits due to be devolved to Holyrood were facing a combined £600million cut by financial year 2020/21.

The Chancellor's plan to raise the threshold at which people pay the higher rate of income tax to £50,000 would remove a further £300million from Holyrood's coffers if implemented in Scotland.

They come on top of a £1.2billion cut to the Scottish Government's annual 'block grant' from Westminster by the end of the decade.

Looking at the next Scottish government's tax options, it said a 1p increase across all rates would raise £500million with the better off paying proportionately more.

Adding 1p to the higher rate alone would only increase revenues by £100million, the report found.

Scottish Labour has pledged to raise the additional rate by 5p, to 50p but with only 17,000 Scots paying it, the IPPR did not calculate the impact separately.

Considering a different option, it said reducing the additional rate threshold from £150,000 would raise an extra £8.5million for every £10,000 reduction.

The report found freezing the higher rate starting point at £43,600 would raise an extra £300million, while allowing it to rise with inflation would raise an extra £100million by 2020/21.

On welfare, reversing planned cuts to universal credit work allowances would cost £200million.

Reversing the Chancellor's freeze on working-age benefits would cost the same amount, the report said.

IPPR Scotland director Russell Gunson said: "With public spending cuts, benefits cuts and proposed tax cuts in the rest of the UK, the scale of the decisions facing the next Scottish Parliament are very significant.

"Ahead of May's elections all the political parties need to be clear how they will meet this funding gap, what balance of tax rises or spending cuts they will look to make, and the reforms they consider necessary to services in Scotland."

He added: "The scale of the challenge means tax rises alone are very unlikely to make spending and benefits cuts go away entirely, but they can certainly make a contribution."

An SNP spokesman said: "In cutting Scotland’s budget year on year, the Tory government is putting the health of our economy at risk and limiting Scotland’s potential.

"However, the SNP has a strong record of using the limited financial powers we already have to protect the most vulnerable from the worst excesses of Tory austerity – and we will continue to do so."

Scottish Labour's public services spokeswoman Jackie Baillie said: "This report underlines the new powers and opportunities coming to Scotland which will frame this election.

"It means we can take different decisions from the Tory government on tax.

"Labour would not pass on George Osborne’s tax cut to the top 15 percent of earners.

"The question now is whether the SNP would do the same."

A spokesman for the Scottish Conservatives said: "Like any government with significant responsibilities on tax and welfare, the next Scottish administration will face some tough decisions.

"The most important thing will be to balance fairness to taxpayers with a fair deal for public services.

"As Ruth Davidson set out last week, that is why we do not think right now is the time for a further tax cut in Scotland."