JOHN Swinney has told MSPs that he will not be able to “insulate Scotland from the damage that's been done” by the Chancellor's mini-budget.

The Deputy First Minister accused Kwasi Kwarteng of “fiscal recklessness.”

Mr Swinney - who is covering for Finance Secretary Kate Forbes during her maternity leave - was appearing before Holyrood’s finance committee after a U-turn by the chancellor on plans to abolish the top 45p rate of income tax for high earners.

Initially, the UK Government had estimated that the £45bn worth of tax cuts announced in the mini-budget would lead to £600m coming to Scotland. 

Mr Swinney told the committee that yesterday's decision meant this was now £540m.

He said any further changes to UK's spending plans for the next financial year could potentially have an effect.

“A significant reduction in social security expenditure, for example, will not necessarily have a direct impact on the Scottish Government's Budget.

"It certainly would have an indirect effect on the challenges that we face.

"But reductions in English departmental expenditure – health, education, local government, various other expenditures of that type – would have a very direct impact on public expenditure in Scotland."

He said Scottish ministers are "obliged to balance the budget", adding: "So we would have to take decisions based on the appropriate balance between taxation and public expenditure, in the light of that data that becomes apparent and also in the light of the block grant adjustments that follow from that."

Mr Swinney said the public sector workforce will "undoubtedly" have to be reduced, but how this is done is "crucial".

He said he wanted to do this "in a spirit of partnership" with the workforce and highlighted recruitment freezes as an example of a "managed and careful" approach.

He told MSPs the pressures were “absolutely colossal, hence why I've had to come to parliament to announce reductions in public expenditure already this year and I may have to do more of that in the period that remains."

Last week, Mr Swinney, who has already announced £500m worth of cuts to the 2022/23 budget, delayed his formal response to Mr Kwarteng's fiscal event until later in the month. 

He said he would convene an “expert panel” specifically to scrutinise the budget and he will report back to Holyrood before the end of October.

The mini-budget, with its unfunded tax cuts and eyewatering levels of borrowing, caused market turmoil, sending sterling tumbling to record lows.

As the prices of UK government bonds or gilts slumped a number of pension funds moved to dump the assets and raise cash in a bid to offset liabilities. 

It was only when the Bank of England stepped in with a promise of a £65bn emergency intervention that the market calmed. 

SNP MSP Michelle Thomson asked Mr Swinney about the impact of the squeeze on Scotland’s economy. 

The minister replied: “I think in all honesty, I can't assure Michele Thompson that I can insulate Scotland from the damage that's been done by the Chancellor's decisions and the investment uncertainty that's been created, because fundamentally, the pension funds that she talks about will look at the United Kingdom, and they will look at the decisions of the United Kingdom Government, and I'm not surprised that they're all very anxious and nervous about it, because it's been a total fiasco, since a week past Friday. 

“I can't overstate the damage that has been done on top of an already really volatile situation by this fiscal recklessness. 

“I'm really worried that in order to go from this veering off to this extreme to that extreme to create market certainty, the casualty will be public spending, and the public spending that vulnerable people in our society depend upon. And that's my big fear about where we sit today.”

Mr Swinney said he was likely going to have to find £700m of savings in this financial year to fund pay deals. 

He said the decision taken by the Chancellor and the impact it had on interest rates would affect the purchasing power of the Scottish budget in the years to come. 

“Because obviously if we are undertaking future borrowing, if we are in any way, co-investing in a proposition with other interested parties, which the government does from time to time, then that will obviously be a factor in the consideration. 

“And if we take for example, some of the investments that our enterprise agencies might make or the Scottish National Investment Bank might make, there will be these are invariably co-investment propositions. 

“Therefore the ability of other parties to co-invest which we rely upon so that there's a sharing of risk might be jeopardised because of these factors. So there's a variety of knock on effects that we may face as a consequence.”