Ministers face budget reduction

The Scottish Government will be forced to make difficult spending decisions

The Scottish Government faces annual budget cuts of at least 2% from the year after next, according to its own official advisers.

The BBC has learned that ministers are being told of the impact of UK Government borrowing to combat the impact of recession.

This will feed through to force difficult spending decisions in Scotland.

Implementation would be required just before the next Holyrood election.

That assessment is in line with an academic analysis by Glasgow economists.

But it is the first admission that the Scottish administration is preparing for cuts.

Business surveys

Until now, the emphasis from SNP ministers at Holyrood has been their objections to the Labour-run Treasury's timing of the expected squeeze on public spending, at a time when the Scottish economy may be struggling back into recovery.

The private warning of cuts comes as the Scottish administration's chief economic adviser publishes a downbeat assessment of Scotland's prospects through the downturn.

Holyrood will soon hear business opinion on the availability of credit Douglas Fraser's blog on economy forecasts

Dr Andrew Goudie said it was unlikely there would be a return to growth until next year.

Current evidence suggests the rate of decline may be slowing, but business surveys are inconclusive about prospects of returning to growth soon.

Dr Goudie said unemployment would continue to rise through next year, and that financial markets were going to take longer to stabilise than previously thought.

His outlook is more pessimistic than the UK Treasury's assessment, and closer to independent forecasting and that of the International Monetary Fund.

His assessment is that Scotland shows few signs of being protected from the recession affecting other developed nations.

It was thought the nation might face a less harsh decline because it had less of a property price bubble, and it has a higher proportion of public sector workers.

With £500m due to be slashed from next year's budget and further potential cuts on the way, no one should underestimate the seriousness of the situation John Swinney Finance Minister

However, the evidence is that its rate of decline has been very close to that of the UK as a whole, if not worse.

Finance Secretary John Swinney said: "This publication adds to the evidence which demonstrates the scale of the economic challenge we face.

"The global downturn is clearly impacting on many areas of the Scottish economy and on the daily lives of Scottish people.

"There are some tentative signs that the rate of decline may be slowing and Scotland continues to show inherent strengths in areas like energy - but the speed, pace and timing of the recovery remains unclear.

"With £500m due to be slashed from next year's budget and further potential cuts on the way, no one should underestimate the seriousness of the situation."

Credit shortage

With UK income falling in the first three months of this year by 1.9%, the Scottish figures are yet to be published, but they are expected to be as steep.

Although evidence is sketchy, the Scottish Government has some evidence that the areas of Scotland worst affected by recession so far are Lanarkshire manufacturing and the Lothians' finance sector.

Manufacturing exports have been particularly hard hit, with a 9.6% fall in the final quarter of last year.

The Holyrood administration has surveyed business opinion on the availability of credit, and those findings are soon to be published.

But the assessment of data already available is that the shortage of credit may have been replaced by slack demand for credit, as companies avoid risk and investment.

Analysis of workforce figures from the start of recession in the middle of last year found Scottish women's employment was harder hit than men's.

This was partly because part-time workers - predominantly women, many of them in retail - were among the first to be shed.

The decline in those counted as employed or looking for work is best explained by about 20,000 women withdrawing from the workforce during the year to March, and not making themselves available for work.

However that gender imbalance from the early stages of recession appears to have evened out in more recent months.

Compared with the rest of the UK, Scotland has lost people from the workforce at a faster rate than most other areas, but its unemployment rate has risen by a relatively low rate.