SCOTLAND faces a funding cut of £239 million next year, the First Minister has warned as she dismissed Philip Hammond’s Budget pledge of an extra £2 billion as “smoke and mirrors”.

Nicola Sturgeon said it was “disappointing” the Chancellor had not refunded VAT payments of £140m made by the police and fire service north of the Border, after confirming these will be scrapped from next year.

Police Scotland and the Scottish Fire and Rescue Service (SFRS) have had to pay the levy since they were created in April 2013, and are the only such services in the UK that are required to do so. Ending the payments will save the forces £35 million to £40 million a year.

Hammond insisted the Scottish Government had always been aware the two organisations — formed from the merger of the previous regional forces — would be subject to the charge.

To the fury of SNP MPs, who have been campaigning to stop the services from having to pay the tax, he said the 13 Scottish Conservative MPs elected in June had persuaded him “the Scottish people should not lose out because of the obstinacy of the SNP government”.

He insisted spending decisions made in the Budget would mean £2 billion for the Scottish Government in what is known as Barnett consequentials.

In a series of tweets, Sturgeon welcomed the scrapping of VAT for the police and fire service and the announcement of a tax break for the North Sea oil industry, but hit out over not refunding the VAT payments.

She said “the headline £2 billion ‘extra spending’ figure for Scotland has much less to it than meets the eye” and tweeted: “Firstly, it is spread over this and next three years.

“Second — and more important —more than half of the headline £2bn (£1.1bn) is in the form of financial transactions — money that can be used for limited purposes only and has to be repaid by @scotgov.

“Taking account of today’s announced changes, next year’s (2018/19) @scotgov revenue budget still facing real terms CUT of £239 million — imposed by the UK Government.” She said the “Chancellor’s announcement of extra £350m for NHS in England this year translates into net increase in @scotgov budget of just £8m”.

She also criticised the Chancellor for failing to announce spending “or any real commitment” to lifting the 1 per cent public sector pay cap — which she has pledged the Scottish Government will do. “Lots more to mull over — but early indications are of more smoke and mirrors than substance. #Budget2017,” she said.

Finance Secretary Derek Mackay described the Budget deal for Scotland as “disappointing” in comparison with the £1 billion given to the Democratic Unionist Party for supporting the Tory minority government at Westminster.

He said: “Scotland’s resource block grant for day-to-day spending will fall by over £200 million in real terms next year and while money for the NHS in England should see a proportionate share come to Scotland, cuts in other UK departments mean that instead of receiving over £30 million this year, the Scottish Government will receive only £8 million — a fraction of that spending.

“The reality is that over £1.1 billion of the money being promised to Scotland over the next four years are loans that the Scottish Government cannot spend directly on frontline public services and that have to be paid back to the Treasury.”

He added: “The reality of today’s budget is that Scotland continues to be hit by UK austerity and the decision to leave the EU. Compared with the £1 billion awarded to the DUP, the funding settlement for Scotland unveiled today is disappointing.”

Graeme Roy, of the Fraser of Allander Institute at the University of Strathclyde, also warned Scotland’s resource budget would be squeezed.

“The Scottish budget is on track to receive additional resources of just over £2 billion between 2017-18 and 2020-21,” he said. “Over 80 per cent of this boost is in the form of capital, with the majority in the form of financial transactions.

“Financial transactions is funding for things like support for ‘help to buy’ schemes and other types of loan/equity initiatives. So while they represent a boost to the Scottish Budget, the government is constrained in how they can be used.”

He added: “The Scottish resource budget is to receive more modest – but still positive – consequentials of around £350 million. As a result it remains on track to be squeezed in real terms over the next two years.

“The challenge therefore remains for Derek Mackay as to how best to balance the resource budget with major commitments like additional support for the NHS, more money for childcare and public sector pay uplifts all to be paid for.”