THE NHS will soon consume half of Scotland’s budget, the country’s top economic thinktank warns today as it calls for an urgent and frank debate about cuts or higher taxes to pay for it.

The Fraser of Allander Institute says health is likely to account for £1 in every £2 of the Scottish Government’s revenue spending by 2021.

It says “tweaks to income tax” will not cover the rising cost and rising demand from an ageing population, forcing Holyrood to consider more “politically challenging” options.

In its annual report on the UK budget, the Institute says Scotland’s budget outlook has improved after a sustained period of austerity.

Overall, Scotland’s budget is likely to go up by 3% by end of the parliament in 2021, although this will be 7% lower in per capita terms than at the start of austerity in 2010.

But it also warns an extra £950m of funding due under the Barnett formula is likely to be offset by weak Scottish income tax forecasts.

In addition, it says the growing dominance and ring-fencing of health spending means other services will continue to face “tough financial squeeze” as they compete for cash.

The report says that, based on current UK and Scottish government plans, “health spending will account for almost 50% of the Scottish Government’s resource budget by the end of this parliament, if not before.

“This trend is only likely to continue, with any further increases in health spending to meet projected growth in demand, only leading to an even tighter squeeze elsewhere.”

It adds: “With ever-growing pressures on health spending from an ageing population an urgent debate is needed about future priorities for tax and spending in Scotland.

Health accounts for just over 40% of this year’s £32bn revenue budget.

Institute director Professor Graeme Roy said: “Whilst the outlook for public spending in Scotland next year has improved compared to what Mr Mackay will have been planning for this time last year, for many parts of the public sector austerity will be far from over.

“Public spending since 2010 has been focused on core areas of health, education and social care. This pattern is set to continue and whilst the outlook for unprotected areas has improved, further cuts cannot be avoided.”

The Fraser of Allander report also refers to the widening tax gap between Scotland and England, which has come to the fore after the UK budget last month.

Chancellor Philip Hammond raised the threshold for the 40p upper rate of income tax to £50,000 in England next year; in Scotland the rate is 41p and the threshold £43,430.

Independent research by the Scottish Parliament this week said that even if Finance Secretary raised all income tax thresholds by inflation in next month’s Scottish budget, it would leave Scots on £50,000 paying £1300 more tax than their English counterparts.

David Eiser, lead author of the Fraser of Allander report, said: “In the last two Scottish budgets, the Finance Secretary raised money from income tax. These changes have been progressive across the distribution, but opened up a tax differential with the rest of the UK that is increasingly visible for Scotland’s 14% highest income taxpayers.

“Income tax choices will be hotly debated again this year, with the Finance Secretary likely to come under pressure to at least partly close the income tax gap with the rest of the UK.

“But this would come with a big price tag. Matching the UK Higher Rate Threshold of £50,000 would cost around £280m.

“The Finance Secretary does have other options to raise revenue, but may need to consider bolder ideas over the longer-term. Perhaps given the parliamentary arithmetic, 2019/20 will be the year we see steps towards genuine reform of local taxation.

“Austerity may be ending, but the Scottish Government will still face challenging decisions on revenue raising and the distribution of expenditure.”

Green MSP Patrick Harvie said the report showed the price of Tory and LibDem austerity cuts.

He said: “Fraser of Allander are right that the growing demand for public services needs a serious debate about both local and national taxation.

“We can raise more funds in a fair way to provide the health, social care and education that Scotland deserves. By dragging their feet on local tax reform, SNP Ministers have made the situation harder to tackle.

“Before they publish their budget on 12 December they have to set out plans to restart this stalled agenda or Green MSPs cannot enter discussions about their spending plans.”

A Scottish Government spokesperson said: “The Fraser of Allander Institute confirms the Scottish budget from the UK Government has been cut significantly in real terms between 2010-11 and 2019-20. They put it at 7% for every man woman and child in Scotland. This is consistent with the positon that the we set out in our Medium Term Financial Strategy in May 2018.

“This supports our frequent calls for the UK Government to end austerity, utilise the fiscal headroom that the Chancellor has available and increase public spending on public services – an opportunity that the UK Government failed to take at last week’s UK Autumn Budget We will set out our priorities and spending plans in the Scottish Budget 2019/20 on December 12.”