SPENDING watchdogs have warned ministers they need to act to avoid an unprecedented budget overspend and should consider axing key policies if public finances deteriorate further.

Auditors have warned the Scottish Government would risk “serious financial mismanagement” if it fails to balance the books in this year’s budget.

In the devolution era, the Scottish Government has never overspent on its annual budget and had to claw back funding in the next year's settlement.

In a briefing paper, Audit Scotland has stressed that rising costs and increasing demands means the Scottish Government “has to closely and carefully manage its position” in order to “avoid the real risk that it will overspend on the 2022/23 budget”.

Rising levels of inflation and public sector pay deals have added to budget pressures for the Scottish Government, which has already earmarked more than £600m of spending cuts.

Audit Scotland has stressed SNP ministers have "recognised that the financial situation it faces is by far the most challenging since devolution".

It added: "An overspend on the budget would be a new development for Scottish public finances.

"The potential consequences and how this would take shape are unclear at this stage.

"Our understanding is that HM Treasury rules mean that any overspend against the 2022/23 budget would be deducted from the following year’s block grant.

"This would mean that there is less funding available for spending on next year’s budget, exacerbating existing pressures on future public spending."

The spending watchdog added that “if the economic or fiscal environment continues to worsen”, SNP ministers “may need to revisit all current priorities and policy commitments”.

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.

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.”

Scottish Labour finance spokesperson, Daniel Johnson, has criticised the Scottish Government for its management of finances.

He 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.

“Not only have the SNP presided over years of low growth and economic stagnation, but they have failed miserably to modernise our public services and invest strategically.

“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.”

Scottish Liberal Democrat economy spokesperson, Willie Rennie, said: "The Scottish Government are complaining that they don't have enough money to spend to deliver public sector pay boosts and essential reform.

“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."

Ahead of the UK Government autumn statement today, Deputy First Minister John Swinney announced more than £600m of budget cuts including £400m from health and social care.

Public Finance Minister Tom Arthur said the Scottish Government recognised the scale of the challenge ahead.

He said: “The Scottish budget today is worth £1.7 billion 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.”

Mr Arthur added: “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.”