Faster reform of the public sector is needed in order for the Scottish Government to avoid an unprecedented overspend in its annual budget.
Audit Scotland said the government’s budget is under growing pressure, including through increased pay deals which have cost an extra £700m so far.
A briefing paper said there is a risk of overspend in the current financial year and the upcoming budget will be “challenging”.
In May this year, Finance Secretary Kate Forbes said the public sector needed to “reshape and refocus”, warning continued growth of staffing levels was not sustainable.
Her Resource Spending Review, which set out indicative plans for the remainder of this parliamentary term, had a broad aim of keeping the pay bill for 2023/24 the same as 2022/23.
Audit Scotland said the pace and scale of these reforms needs to increase.
If the Scottish Government overspends during a financial year, the money can be clawed back in the following year’s budget – though this had not happened in the devolution era.
The auditors said setting the next budget will be affected by spending and tax decisions taken at a UK level.
Stephen Boyle, auditor general for Scotland, said: “The Scottish Government, like all governments, has to deal with the immediate challenges that external events bring.
“But to improve lives and protect services in the long-run, these challenges cannot distract from the need for broad reform of the public sector.
“Balancing short and long-term demands is always a difficult task, but the significant financial pressures on Scotland’s public bodies have been growing for several years, and there is now an urgent case for the reform of how services are delivered.”
Responding to Audit Scotland’s report, Public Finance Minister Tom Arthur said the government recognised the scale of the challenge ahead.
“The Scottish Budget today is worth £1.7bn less than when it was published last December because of the rapid rise in inflation and the current devolution settlement leaves us limited in the amount we can borrow.
“At the same time, demand for government support is understandably increasing and so to prioritise help where it is needed most, we have to make tough decisions.
“We are required to balance our budget every year and the recent Emergency Budget Review demonstrated the steps we are having to take to do so.”
He continued: “The Scottish Government is committed to carrying out public service reform as outlined in the resource spending review in a sustainable and progressive way.
“But the decisions we will have to take will only be exacerbated if there is a return to austerity by the UK Government.
“That would heap further pressure onto the cost-of-living crisis people are facing in Scotland and have a knock-on impact on the Scottish Budget and our ability to meet increasing demands on vital public services.”
Scottish Liberal Democrat economy spokesperson Willie Rennie commented: “These problems have been brewing for years because of a failure of the Scottish Government to generate economic growth and reform the operation of public services.
“Meanwhile they are wasting scarce funding on a fresh bureaucracy for the social care sector, plans for breaking up the UK and national testing of four-and five-year olds.
“Almost every major industrial project or intervention runs over budget and over time – the economic situation is clearly tough but it is being made tougher by out of touch of SNP ministers.“
Scottish Labour finance spokesperson Daniel Johnson said: “Years of mismanagement from the SNP left public finances in chaos long before this current economic crisis and Scotland’s public services are stuck in the past.
“If they don’t get a grip and fix these issues we are facing more decline and damaging cuts.
“The SNP need to deliver more transparency and openness around their budget, so we can have confidence that every pound of public money is going to good use.”
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