Finance Secretary Derek Mackay has warned public spending cuts may be needed to deal with a £1billion black hole in the Scottish budget.
Mr Mackay issued the warning as the Treasury prepares to reduce the Scottish block grant during the next three financial years.
Independent forecasters at the Scottish Fiscal Commission (SFC) have already warned that ministers may need to either increase taxes or cut public spending as a result of the decrease in Scottish income tax receipts over the next three years.
MSPs on Holyrood’s Finance Committee pressed Mr Mackay on how the Scottish Government will cope with the £1billion funding shortfall.
According to the SFC, the Scottish Government will receive £229 million less in income tax receipts in next year’s budget, £608 million less in 2021-22, and £188 million less the following year.
Mr Mackay said the Scottish Government “may have to look at spending” when considering the Scottish budget.
Labour MSP James Kelly described the funding gap as “really stark”.
Tory MSP Adam Tomkins said: “You have a £1billion black hole in your budget, the Fiscal Commission say there isn’t enough in the Scottish reserves, there isn’t enough in your borrowing powers to cope with that.”
The Finance Secretary, who accepted his powers were limited, said: “The forecast reconciliation at £608million does indeed go beyond any deployment of draw-down of reserves or the borrowing power that we have and, even if we maxed both, it would be true to say that doesn’t reach £608 million.”
He argued this highlighted the “inadequacy” of ministers’ powers, with Scottish Government resource borrowing capped at £300million a year, while only a maximum of £250million a year can be removed from cash reserves.
Mr Mackay insisted he would take a “prudent, fiscally responsible approach” to dealing with the reduction in income tax receipts.
With Scotland’s total block grant for the three years still to be determined, the Finance secretary added Treasury cash would play an important part in managing the situation.
Mr Mackay said: “It will still be the case that the majority of funding comes from the block grant. So the block grant… is still significant to Scotland’s budget.”
But he added: “Yes we may have to look at spending as well, of course, but that will be as well as all the other determinants that set the Scottish budget.”