Public spending cuts may be needed to help deal with a possible Scottish budget shortfall of more than £1 billion, the Finance Secretary has warned MSPs.
Derek Mackay said he “may have to look at spending” as the Treasury prepares to reduce the Scottish block grant over the next three financial years.
Experts at the Scottish Fiscal Commission have already warned that ministers may need to either increase taxes or cut public spending as a consequence of income tax reconciliations.
MSPs on Holyrood’s Finance Committee pressed Mr Mackay on how the Scottish Government will cope with the looming funding shortfall.
Reductions to the Scottish budget are forecast to grow from £229 million in 2020-21 to £608 million the following year, before falling back to £188 million in 2022-23 – with Labour MSP James Kelly telling the Finance Secretary: “The problem is really stark.”
As the Scottish Government is limited in the amount it can borrow and the amount of reserve funds it can utilise, Tory MSP Adam Tomkins said minsters would either need to make cuts to spending or hike taxes.
He told Mr Mackay: “You have a £1 billion black hole in your budget, the Fiscal Commission say there isn’t enough in the Scottish reserves, there isn’t enough in your borrowing powers to cope with that.”
The Finance Secretary accepted his powers are limited, saying: “The forecast reconciliation at £608 million does indeed go beyond any deployment of draw-down of reserves or the borrowing power that we have, even if we maxed both it would be true to say that doesn’t reach £608 million.”
He argued this highlights the “inadequacy” of ministers’ powers, with Scottish Government resource borrowing capped at £300 million a year, while only a maximum of £250 million a year can be removed from cash reserves.
Mr Mackay insisted he would take a “prudent, fiscally responsible approach” to dealing with the “substantial reconciliations” – although he added the situation is not helped by “Brexit uncertainty”.
With Scotland’s total block grant for the three years still to be determined, the Finance Secretary said that would play an important part in managing the situation.
He told the committee: “As we look at the potential reconciliations, the tools we have to manage that will include what available resources are there at the time, bearing in mind that although we have the availability to draw down from the reserve and we have the borrowing powers, actually it will still be the case that the majority of funding comes from the block grant.
“So the block grant… is still significant to Scotland’s budget.”
But he also stated: “Yes we may have to look at spending as well, of course, but that will be as well as all the other determinants that set the Scottish budget.”