The Scottish Government should get ready for further cuts of up to £1.6 billion in its budget by 2020-21 — and local authorities could bear the brunt of the cuts — according to a new report by the University of Strathclyde’s Fraser of Allander Institute.

With Holyrood’s growing fiscal responsibilities, Scotland’s economic performance will now have a much greater bearing on the spending plans of the Scottish Government than ever before, the report said.

And it warned that with Scottish Government plans in place to deliver major policy priorities, difficult choices for “unprotected budgets” — including the grant to local authorities — will be required.

“The Scottish Government has set out plans to deliver ambitious new policy priorities, including real terms increases in the health budget, a doubling of childcare provision, and protection of the police budget,” said Professor Graeme Roy, director of the Fraser of Allander Institute.

“Delivering on these will, however, require a tough re-prioritisation in other areas.

“As an area of unprotected spend, the grant to local government could be cut by around £1 billion on a like-for-like basis by 2020-21.

“Without radical reform, cuts to services are likely to become increasingly apparent in the years ahead, providing a controversial backdrop for next year’s local elections.”

The institute’s report, Scotland’s Budget, is the first major, independent analysis of the opportunities and challenges facing the Scottish Government’s Finance Secretary Derek Mackay ahead of his forthcoming Budget.

The report sets out a range of scenarios for Scotland’s budget over the next four years.

Even before the uncertainty caused by Brexit, the Scottish Government’s budget was forecast to fall by just over 3% in real terms by 2020-21 as result of the UK Government’s ongoing fiscal consolidation.

But the report warns that under a worst case scenario for the block grant and revenues from Scotland’s new tax powers, the Scottish Government may have to get ready for cuts of up to 6% – or up to £1.6 billion – over the course of the parliamentary term.

Even under more optimistic scenarios, the Scottish budget is still projected to fall in real terms over the course of the parliament.

The report comes as the Scottish Parliament’s fiscal responsibilities expand rapidly.

Around 40% of devolved expenditure will now be funded by tax revenues collected in Scotland, a figure that will rise to 50% once half of VAT revenues are assigned.

“If Scotland can grow its economy more quickly than the rest of the UK, then it will now retain a share of the revenues that this generates,” said the report.

“But if it grows more slowly, then it will bear the risk of lower revenues.”

The Scottish Government will also have the opportunity to set different tax rates and allowances within devolved taxes to raise or lower revenues and to determine spending on new devolved benefits.

Professor Roy continued: “Brexit uncertainty, a weakening UK fiscal position, ongoing UK welfare reform, and a fragile Scottish economy, means that the devolution of powers over tax and social security could not have come at a more challenging time.

“The combination of a weakening in the outlook for the UK public finances impacting on Scotland’s block grant, a challenging outlook for devolved revenues, and a series of significant spending priorities – particularly in health and the planned transformation in childcare – will require a substantial re-prioritisation of spend and reform of public services in Scotland.

“While the challenge falls on the Finance Secretary, critics of the forecast cuts in unprotected public services will have to point out where – with a highly constrained overall funding settlement – their priorities for cuts would be and what taxes they would increase.”