Scotland faces tough new budget choices post-Brexit - think tank

EDINBURGH (Reuters) - Scotland's government faces the prospect of having to make deeper spending cuts after Britain's vote to leave the EU, a think tank said on Tuesday, adding to the challenge of implementing its new tax and spending powers. The uncertainty caused by the Brexit vote and its impact on the economy mean Scotland's public finances will likely be harder to manage, the Fraser of Allander Institute said. The pro-independence Scottish government has promised more generous welfare spending such as a doubling of public pre-school childcare over the next five years as it seeks to counter budget cuts by Britain's national government and gets a greater say in Scottish spending. Scotland's public finances are partly funded by a block grant from London and partly by an increasing share of Scottish tax revenue. Whereas in the past tax bands and rates were set by the national government in London, this year the Scottish government has the power to set a portion of its own taxes. The Edinburgh government has indicated it will not present its draft budget for next year until British finance minister Phillip Hammond has delivered a budget statement on Nov. 23. "Overall, the Scottish government should prepare for possible further real-terms cuts of 6 percent - or up to 1.6 billion pounds – in its resource budget by 2020-21," the report from the Strathclyde University-based research outfit said. Before Brexit, a budget cut of around 3 percent over that period had been expected, it said. "The transfer of new fiscal powers means that the outlook for the Scottish budget is crucially dependent upon Scotland's relative economic performance," it added. Scotland's economy has underperformed the United Kingdom as a whole in recent years, mainly because of falling prices for oil. The Fraser of Allander Institute predicted Scottish economic growth of 0.9 percent in 2016 compared with 1.6 percent for the UK as a whole. "The UK government's austerity means we are already facing a 10 percent real terms cut to our budget over the 10 years to 2020 - now the chaos caused by Brexit threatens to make those cuts even harder," Scotland's Finance Secretary Derek Mackay said in a statement. The devolved government has pledged to honour Scotland's vote to stay in the EU, despite Britain's overall vote to leave in June. It has argued that Scotland should have a fresh option to split with the UK if the terms of "Brexit" do not suit. However, a Kantar TNS poll published on Tuesday showed support for independence only two percentage points higher than it was in 2014, when independence was outvoted 45 to 55 percent. (Reporting By Elisabeth O'Leary; editing by William Schomberg)