The Scottish Government is facing a £1bn shortfall for day to day spending next year – with this projected to rise to almost £2bn just three years later.
Deputy first minister Shona Robison outlined the “extremely challenging” picture at the same time as she told MSPs of the “record falls in living standards” being experienced by Scots.
Real disposable income has fallen by 4.1% between 2021-22 and 2023-24, she said, adding it is not expected to recover to pre-pandemic levels until around 2026-27.
Robison, who is responsible for finance within the Scottish Government, stressed she will not back away from taking the “tough decisions”.
But she also called on Westminster to provide more money, saying soaring inflation means more cash is needed for capital spending.
She also urged the UK Government to provide additional funding to cover “reasonable pay settlements” for public sector workers.
She addressed MSPs as the Scottish Government’s medium-term financial strategy showed resource funding is expected to increase from £45.26 billion in 2023-24 to £50.971 billion by 2027-28.
But Robison said Holyrood ministers are still facing a “real-terms reduction” in the block grant they receive from Westminster for 2024-25.
She added: “Resource spending is projected to grow and this means our resource spending requirements could outstrip our funding by £1 billion in 2024-25, rising to £1.9 billion in 2027-28.”
For capital spending, used to fund major infrastructure projects, Robison said there could be a gap of “around £900 million by 2025-26”.
Describing this as “unsustainable”, she said there will need to be a “reset” of both resource and capital spending in next year’s Scottish budget.
The budget, due to be unveiled towards the end of this year, will “set out this Government’s plans to put our public finances on a more sustainable path”, Robison said.
She vowed Scotland will continue with its “progressive” taxation, which sees higher earners pay more income tax than they would south of the border.
Robison insisted: “Ensuring that the burden of taxation is placed on those with the broadest shoulders will continue to be the cornerstone of our approach.”
An updated tax strategy will be published alongside next year’s medium term financial strategy, she told MSPs.
Despite “incredibly challenging times”, Robison said her Government is seeking to deliver its “key priorities for Scotland’s people”.
She said: “I am committed to taking the tough decisions required to deliver focused, ambitious and affordable measures which protect our environment, promote business growth, and improve wellbeing through the reduction of poverty for the people of Scotland.”
Conservative finance spokeswoman Liz Smith said the “very precarious situation facing the Scottish economy”, with a “significant gap” between spending and resources, is “yet more proof of the SNP’s utter failure”.
She highlighted “widespread concern in the Scottish business community that Scotland is the highest taxed part of the UK, with the serious detrimental effects this has had on innovation, jobs and growth”.
Labour’s Michael Marra spoke of the “record fall in living standards” among Scots as household disposable income drops.
He said: “There are far too many people who are seeing their lives diminished in Scotland, the end of the pay cheque before the end of the month.
“It is disappointing that there is almost nothing in this document about a strategic approach to growing wages and helping household income for the vast majority of the population.”
He went on to say there is “no answer” from the Government to the “central question of our public finances, the £1.9 billion gap between the tax we collect and the policy commitments this Government has made”.
Marra insisted “part of the job of Government is to set out where that gap is going to be addressed”.
Roz Foyer, general secretary of the Scottish Trades Union Congress (STUC), also complained of a “worrying lack of ambition from Government ministers which cannot be condoned”.
She insisted: “Tax reform cannot be kicked down the road for another year. To protect services and pay, the Scottish Government must make good on the First Minister’s pledge to leave no stone unturned in seeking to raise additional income by rebalancing wealth.
“This means committing now to the policy changes required to introduce wealth and property taxes as the STUC has advocated.”
A UK Government spokesperson said: “The Scottish Government’s own figures show how we all benefit massively from being part of a strong, resilient UK.
“In 2021-22 public expenditure per person in Scotland was £1,963 higher than the UK average and the Scottish Government’s spending review settlement, at £41bn per year, is the highest since devolution.
“On top of this, there is an extra £1.8bn for the Scottish Government over the next two years as a result of UK Government decisions at the autumn statement and the spring Budget.
“As global issues put pressure on the cost of living, the UK Government has provided cash support for every household, and additional support for the most vulnerable households, while we deliver economic growth by reducing debt and halving inflation.”