THE SNP-Green Scottish government is facing its biggest challenge since devolution due to a £1.5 billion budget gap, an economic think tank warned today.

The shortfall is the largest since the Scottish parliament was reconvened in 1999, leading SNP Finance Secretary Shona Robison to warn recently that jobs in the public sector will be “reduced.”

Ahead of Ms Robison’s inaugural budget speech to Parliament on Tuesday, the Fraser of Allander Institute has warned widely trailed increases to income tax will not meet either its £800 million revenue gap or £700m of capital spending.

Fraser of Allander deputy director Joao Sousa said: “There has been a huge amount of speculation on whether new income tax bands will be introduced to help with the government’s funding position.

“A new 44p rate above £75,000 will raise around £40 million — not insignificant of course, but nowhere near sufficient to balance the books.”

Institute director Professor Mairi Spowage said: “This large funding gap will mean difficult choices for the Scottish government on what to prioritise.

“Deputy First Minister Shona Robison may choose to use powers over income tax to raise more revenue to plug this gap, but it is unlikely that this would be sufficient in isolation.

“Significant spending cuts are also likely to be required — Ms Robison has the unenviable task of choosing where the axe will fall.”

Even before the budget is set, funding shortages this year mean that health boards across Scotland are running significantly over budget and colleges are facing a cash crisis — with some having only days of reserves in hand.

The Convention of Scottish Local Authorities (Cosla) has warned that struggling councils could become “effectively bankrupt” in the new year without a cash boost.

In that context, Professor Spowage echoed not only First Minister Humza Yousaf’s Green coalition partners, but councillors from across the parties in challenging the wisdom of his pledge to “fully fund” a council tax freeze.

She added: “One would question whether the best way to spend limited resources in this constrained fiscal environment is to fund a council tax freeze.”

A Scottish government spokesperson said: “In May, the Deputy First Minister set out in our medium-term financial strategy how we will ensure Scotland’s finances remain on a sustainable footing.

“The Scottish Budget will build on this, outlining the tough choices that have been required to target funding at our three key missions — equality, community and opportunity.”