Strathclyde University’s Fraser of Allander Insititute has warned the Chancellor that repeated warnings about “difficult decisions” will “dent” confidence for both businesses.
Professor Mairi Spowage, director of the think tank, said this could ultimately offset the “softening economic performance” experienced over the summer.
Her comments came as the institute upgraded its forecast for economic growth, saying GDP in Scotland could rise by 0.9% in 2024 – up from the 0.7% it had forecast in June.
Its latest economic commentary, sponsored by Deloitte, said that this change “reflects the modest economic improvements observed in recent months”.
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But the report added: “Despite the near-term optimism, projections for 2025 and 2026 remain unchanged at 1.1% and 1.2% respectively.”
It found that economic growth in 2024 had been “more sustained than the stop-start pattern we saw in 2023” – with the report noting Scottish growth figures of 0.6% for the first three months and 0.5% for the period April to June were “much stronger than in recent years and just lagging behind the UK slightly”.
But it added that economic growth in May and June had been “close to zero”, with this followed by a 0.3% rise in July.
Meanwhile UK data for July “suggested that the economy was flatlining”, with researchers saying this could mean that “sustained growth may be difficult to maintain for the rest of the year”.
Rachel Reeves is due to set out her tax and spending plans at the end of the month.
She and the Prime Minister have already warned that in a bid to tackle what they say is a £22bn black hole in the public finances, the budget will be “painful” and that “things will get worse before we get better."
Earlier this week, it emerged that the Chancellor had asked her colleagues to draw up plans for billions of pounds in cuts to infrastructure projects over the next 18 months.
The Guardian reported that members of the cabinet have been asked to model cuts to their investment plans of up to 10% of their annual capital spending.
The budget on October 30 is expected to include a number of other spending efficiencies, as well as a slew of tax rises.
The new Labour government blames Rishi Sunak’s administration for a number of unfunded commitments.
However, the Tories say Keir Starmer spent an eye-watering amount on settling public sector pay disputes, accounting for as much as £9bn of the deficit.
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Prof Spowage said: “The new Chancellor Rachel Reeves has set out her view of their fiscal inheritance and the difficult decisions which may need to be made in order, as they would see it, to restore economic stability.”
Prof Spowage added: “The rhetoric around this has the potential to dent business and consumer confidence and contribute to the softening economic performance over the summer.”
But she added: “It is always difficult to definitively say that – the economy is a dynamic organism rather than a predictable mechanism.
“Many businesses may well be waiting to see what is in the Budget on October 30 to have the confidence to grow and invest.”
Douglas Farish, head of tax for Scotland at Deloitte, meanwhile highlighted the “understandable uncertainty” among both the public and private sectors ahead of the UK Budget and the Scottish Budget, which will take place just over a month later on December 4.
Mr Farish said: “With the country facing economic challenges and financial constraints, bold public service reform is not just desirable – it’s essential to improve the way public services are delivered.
“As we approach the UK Budget in October and the Scottish Budget in December, there is understandable uncertainty across both the public and private sectors.
“Amidst these challenges, businesses and communities will be looking for stability and a clear path forward.
“It’s critical that these announcements provide thoughtful and decisive reforms that address today’s fiscal pressures, creating a more efficient and resilient public sector that can help navigate these economic headwinds while facilitating long-term, sustainable growth.”
A UK Government spokesperson said: “The Chancellor has been clear that the prize for bringing stability to our economy is investment and well-paid jobs, which is why next month’s Budget will be about fixing the foundations of our economy, so we can deliver on the promise of change.
“We are committed to working with the Scottish Government on our shared priority to kickstart economic growth so we can make every part of Scotland better off.”
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