DEPUTY First Minister Shona Robison has warned of “tough choices” after telling MSPs that the Scottish Government is facing a £1.9 billion spending shortfall. 

Outlining the revised Medium Term Financial Strategy, the Finance Minister said the current fiscal situation was “amongst the most challenging since devolution.” 

“Scotland has faced a succession of economic shocks, with the Covid pandemic, the war in Ukraine and soaring inflation.  All of these are driving significant pressures on the economy, society and the public finances,” she told MSPs. 

Ms Robinson hinted that she may need to cover the billion-pound black hole by hiking taxes and “deprioritising” other areas of government spending. 

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Forecasts produced by the Scottish Fiscal Commission said the economy would “remain largely flat” this year rather than fall into the shallow recession predicted in December.

However, despite this marginal improvement in the forecast for GDP and low levels of unemployment this year, living standards were once again likely to fall in 2023-24.

In Holyrood, the minister said that the block grant from the Treasury would fall in 2024-25 as resource spending was projected to grow.

She said: “This means our resource spending requirements could outstrip our funding by £1 billion in 2024-25, rising to £1.9 billion in 2027-28.”

Ms Robison said the key drivers were inflation, rising costs in social security, health and social care and the public sector pay bill. 

“These also affect the current budget year” Ms Robison warned.

“Since the 2023-24 Budget was set, we have agreed pay settlements for teachers, fire fighters and NHS staff, which of course recognise the impact the cost-of-living crisis is having on our valued public sector workers.

“This will require us to carefully manage our limited resources, with any changes clarified via the Autumn and Spring Budget Revisions.

“The pressures are more severe for capital spending, where the price of infrastructure projects has risen by 14.1 per cent this year, according to the Office of National Statistics. Combined with the UK Government’s failure to inflation-proof our capital budget, we are facing a real terms cut every year up to 2027-28.

"This challenge is particularly acute in 2024-25, where funding will reduce by 3.7% in real terms.

“On the current trajectory, we expect the divergence between capital funding and expenditure to grow to around £900 million by 2025-26.

“This is unsustainable and we will need to reset our spending for both capital and resource in the 2024-25 budget to which I will return.”

Ms Robison urged the UK Government to increase capital funding in line with inflation, and to provide additional money to cover “reasonable pay settlements” for public sector workers.

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The minister said that the government would be guided by their three missions, tackling poverty, growing the economy and prioritising public services.

“In order to prioritise the programmes, such as early learning and childcare, which will have the greatest impact on delivery of our three missions, we will need to deprioritise programmes that make a less meaningful contribution to our central mission,” she said. 

The minister said she would refresh both “resource and capital multi-year spending envelopes as part of the 2024-25 Budget."

Ms Robsison that while she did not “hold all the levers necessary to make the Scottish tax system work in the most effective way,” she did have options “around who and what to tax, and by how much.” 

“Scotland already has the most progressive tax system in the UK. Ensuring that the burden of taxation is placed on those with the broadest shoulders will continue to be the cornerstone of our approach.

“I commit today to publishing an updated tax strategy alongside the next MTFS, which will build on the principles we set out in the Framework for Tax in 2021.

"In order to support this work, I will also chair an external tax advisory group to ensure our future tax strategy is informed by a broad range of views.”

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Liz Smith, Conservative Shadow Finance Secretary said the statement was “yet more proof of the SNP’s failure to address the really big issues.” 

“All we got was the usual excuse that everything is Westminster’s fault, which is simply not true,” she added.

“The SNP is failing to address the imbalances in our labour market, Scotland’s persistently low productivity and lack of competitiveness and, worst of all, ways to boost our economic growth.

“The Cabinet Secretary has done nothing to acknowledge the widespread concerns of the business community over Scotland being the highest taxed part of the UK, and the damaging impact of that on innovation, jobs and growth.

“She said nothing about what the Scottish Government will do to address the stark warnings from the Scottish Fiscal Commission that the current tax structure will not provide the revenue necessary to fund current projected Scottish Government expenditure.

“And with the proposed new tourism tax, the Cabinet Secretary again demonstrates the SNP’s disregard for the hospitality, tourism and retail sectors. They are still reeling from the SNP’s failure to provide the business rates relief available in the rest of the UK, and vital to Scotland’s economic recovery.”

Scottish Lib Dem leader Alex Cole-Hamilton said it was clear that spending cuts were coming.

"The Cabinet Secretary has refused to treat Parliament and the general public like adults by explaining where those cuts are coming from.  

“This is, in large part, caused by suboptimal growth in GDP and low productivity.  

“The Scottish Government has just cut £46m from our world-class universities and colleges. They are generators of growth."