THE Scottish Government’s spending review will face “tough decisions” between “axing, taxing or hoping for extra funding” after benefits were expanded, the Institute for Fiscal Studies (IFS) has said.

The Scottish economy is facing a £3.5 billion deficit by 2026/27 - the equivalent of £640 per person - and will be “no easy task” to conquer, IFS economists have said.

The figure could move to a £10bn shortfall or a £4bn surplus according to Scottish government predictions, but the IFS have said that a “substantial” gap is likely.

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It comes as Finance Secretary Kate Forbes will announce a multi-year resource spending review to set out spending plans to meet child poverty targets, climate change targets and boost the economy, for the first time in a decade.

A spokesperson for Forbes said that there were undoubtedly challenges ahead and noted that rising inflation was having an impact on the Government’s finances.

The Scottish Resource Spending Review report has said the Government may have to consider dropping some policy commitments if Westminster refuses to provide extra funding to make up the shortfall.

Ministers have a number of options, the reports says, from asking Westminster for more cash, overspending in the hope the UK bails out the funding or decides to provide borrowing powers to Scotland, which it has previously and consistently refused to do.

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The IFS said: “Difficult choices on Scottish tax and spending over the next few years will eventually have to be faced.”

“Political considerations – including those related to the Scottish Government’s desire for another independence referendum – will undoubtably play a role in whether those choices are made clear next week or not.

“Announcing them could be delayed but they can’t be avoided for long.”

The IFS report also said the Scottish Government’s bid to plan ahead with the multi-year spending review was “laudable” but added there may be issues as budgets are dependent on UK Government decisions, which filter down through the Barnett formula and limited borrowing powers.

It also added that a series of factors have heightened the “delicate trade-offs” facing the Scottish Government some of which were “its own making” in areas such as doubling the Scottish Child Payment and expanding it to older children, reforming disability benefits to expand who can claim them and widen the scope, and a “number of small benefit enhancements”.

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The report added: “Such measures mean that as of last December, the Scottish Fiscal Commission was forecasting that Scottish social security spending was set to exceed the funding provided by the UK Government by at least £750 million and potentially more like £1 billion per year by 2026-27.

“This means less money for public services or higher taxes than otherwise would be the case.”

The Scottish Tories dubbed the shortfall as a “product of incompetence” from the Scottish Government, adding that it “squandered taxpayers’ money on a whole range of failed public sector projects, of which the ferries fiasco is top of the long list”.

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Meanwhile, Scottish Labour finance spokesman Daniel Johnson said the report “lays bare the price of SNP failure”.

He added: ”It is clear that the spending review, due next week, will spell out the heavy cost all Scots will have to pay for nationalists prioritising constitution over the economy."

A spokesperson for Forbes said: “The IFS are right to highlight the challenges caused by rising inflation and by uncertain UK Government funding decisions, which can dramatically reduce Scotland’s budget at the drop of a hat.

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“While the Chancellor offered some support to households, he has done nothing to support the public sector and public sector workers, who have helped the country through the pandemic, in the face of rising costs.

“Our budget is already worth less this year as a result of inflation and – without the borrowing levers available to other governments – the Scottish Government faces challenging spending decisions.

“The spending review is not a budget but it will set out how, within those limited means and powers, we will focus our resources to help with the cost-of-living crisis, to tackle child poverty – which is only being exacerbated by the actions of the UK Government – to grow our economy and to support our public sector.”.