Scotland's budget squeeze is becoming clear – the question is how it will respond

It was striking how much chancellor George Osborne and Scottish deputy first minister John Swinney agreed about the public spending settlement coming to Scotland for the next four years, when the UK government announced its autumn statement and spending review last month. At the time, both described the deal in similar terms. Swinney described the cuts as ‘continued austerity’ hitting ‘the poorest hardest’; Osborne described the funding settlement as one that meant the SNP had ‘hard choices’ to make – the tone more anger than sorrow.

It's now clear that both were right. Scotland's draft budget does set out increased spending for the NHS and restated commitments to childcare and affordable housing. But it also outlines 'tough choices' around increased taxes and spending cuts elsewhere.

To get through this next year Swinney has made the choice to increase tax revenue from people buying second homes – a similar measure, though smaller in scale, to Osborne's own proposal last month – and to increase the business rates that larger businesses in Scotland will pay. However, despite these tax increases, many departments will face real-terms cuts over the next year, with the biggest cuts affecting universities, prisons, legal aid and – in particular – local authorities, who are facing significant cuts of around three-quarters of a billion pounds. Cuts to Scotland's councils will be of particular concern given that childcare and school spending comes through their budgets.

It will be interesting to see what lessons Scotland's councils will draw from the experiences of English local authorities over the past few years. Many have had to attempt to find various ways to juggle very significant cuts to funding while continuing to deliver essential local services, and it looks like Scotland’s councils may need to follow the same path.

This budget is also only for one year. The increased taxes and cuts outlined by the Scottish government are enough for one year only, meaning they will need to repeated next year and for years to come – in fact, they are likely to increase in 2018/19 when the largest funding cuts to Scotland may hit. This will be very difficult to do indeed, particularly if money is to be found in the future for mitigating benefits cuts. Leaving budgets to diminish in line with inflation might be possible for one year, but may not be for another five (following the years of cuts many have seen already). Swinney has signalled that the Scottish government will now consider public service reform on a wider scale than attempted before, which might indicate the shape of his response to the scale of the challenge.

At the same time, the draft budget today covers only devolved public spending. We already know that benefits funding will be cut significantly across the UK, and that this will hit Scottish families hard. We’ve analysed the impact in Scotland of Osborne’s decisions on benefit cuts, income tax changes and the increase in the minimum wage (the so-called ‘living wage’).

Despite the scrapping of proposals to cut tax credits, greatly heralded on the day of the announcement, we see this more as cuts delayed than cuts avoided. Over the coming years, those on tax credits will be moved onto universal credit, and because the cuts to universal credit are still going ahead, the poorest families will still lose many hundreds of pounds each year, with those facing benefits cuts losing over £800 a year on average. To reverse these cuts in Scotland, we estimate, would cost around £500 million per year.

So a double whammy of benefits cuts and cuts to public services in Scotland looks to be coming between now and 2020. There is a fair debate about who’s to blame for these tough choices. However, regardless of where the cuts emanate from, it is without question that the focus will shift to what Holyrood can and should do about them over the coming years.

This is a question that has begun to be answered today, but in reality it’s a question that will be asked of Scotland for many years to come. Will the Scottish government aim to mitigate benefits cuts when they hit next year and in the years after, as it did with the ‘bedroom tax’? Will the next Scottish government look to raise taxes through potential new income tax powers to lessen spending cuts in Scotland? What pressure will opposition parties place on the SNP – now, during the election and beyond – with proposals of their own? And what balance will be struck between short-term mitigation and long-term prevention?

There are fundamental questions that face Scotland over the size and role of the state, and the route Scotland will take in the future: a Nordic-style model, an Anglo-American economic model, or a uniquely Scottish approach. As the prospect of more powers for the Scottish parliament looms larger, some initial and partial answers to these questions will be provided by this budget, the Scottish parliament elections in May, and throughout the next parliament. Without question, by the end of the next five years Scotland will have been reshaped in many important ways. In my view, how, in what way, and to what end are decisions that should stem from a debate that includes the widest and deepest range of voices in Scotland as possible.