A devastating new analysis of Scotland’s budget predicts that the country could see a spending shortfall of close on £3 billion within four years, placing some of devolution’s most cherished policies under threat.

Audit Scotland, the nation’s spending watchdog, warns that with the budget declining rapidly in real terms, a public spending squeeze is inevitable, making the long-term affordability of policies such as free personal care of the elderly, concessionary travel, free prescriptions and free eye tests for Scots, vulnerable to deep cuts.

The report, published today, says that there could be a shortfall of up to £2.9 billion by 2013 between what the government plans to spend and the cash available.

This “black hole”, allied to cost pressures brought on by an ageing population, a roads and buildings maintenance backlog, public sector pay deals that stretch over several years, and unemployment, means that Scotland’s public sector will come under the greatest financial pressure in the ten years since devolution, it says.

Audit Scotland also poses a major question over the SNP government’s commitment to deliver 2 per cent efficiency savings beyond 2011 to help to bridge the funding gap, saying that this will not be achievable “without a fundamental shift in how services are delivered”.

The report says: “It will be very challenging to maintain current levels of public services and meet new demands when resources are tight.”

It notes that while in 2009-10 the total Scottish budget is £34.7 billion, by 2013-14 it could fall by between 7 per cent and 13 per cent lower in real terms.

“Reductions of this size will present a significant challenge for the Scottish public sector in sustaining and improving services,” it warns. Ministers will have limited room for manoeuvre, according to the report, in adjusting the budgets in the public sector in the short term because most of the costs are fixed — such as salaries and pensions, running costs of buildings and costs of capital and essential supplies.

“In addition, the ageing population and the effects of the recession are likely to increase the demand for some services.

“Two per cent efficiency savings will not be sufficient beyond 2011 to bridge the gap between public spending and the smaller budget available.”

The report says that the number of older people in Scotland is projected to rise by 31 per cent over the next 25 years from 1.02 million to 1.34 million, with a significant increase (84 per cent) in people aged 75 and over, leading to much greater demand for health and social services.

Rising unemployment, it warns, could also mean increased pressure for these sectors, as well as a rise in the levels of drug and alcohol abuse and mental health problems such as depression.

It also predicts increased crime and more demand for social housing and further education.

Of the universal services currently offered by national and local government in Scotland, Audit Scotland says that the cost of free personal and nursing care for older people could be £562 million by 2011, up from £382 million in 2002.

In his comments on the report, Robert Black, the Auditor General, said. “The first ten years of devolution was a period of significant growth for the Scottish public sector. That picture is changing fast.

“There are serious financial pressures ahead and the whole of the public sector must quickly find ways of making informed decisions about competing priorities.”

John Swinney, the SNP Cabinet Secretary for Finance, said he welcomed the report as it “confirms the scale of the financial challenges I expect Scotland will face in the medium term”.

He claimed that the government’s efficiency programme would deliver £3.2 billion in cash savings by 2011.

The Scottish Conservatives said the SNP government needed to wake up to reality. Derek Brownlee, their finance spokesman, added: “Alex Salmond in particular must stop misleading the public by claiming that the SNP can prevent spending cuts.”

Andy Kerr, Labour’s finance spokesman, accused the SNP government of wasting resources on party priorities such as the National Conversation on Scotland’s constitutional future and preparing a Bill for a referendum on independence that would be defeated in the Scottish Parliament.

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