The Scottish Government faces a "very difficult" financial position over the next few years, Finance Secretary Kate Forbes said yesterday.
The Institute for Fiscal Studies (IFS) has now warned that certain areas of spending could be axed, or another option is raising taxes.
The independent research institute has highlighted the issues that the Scottish Government faces - and one of them is Income Tax, with this year's revenues expected to be £190million lower than if Income Tax had not been devolved.
It adds: "Expensive policy commitments and relatively-slow forecast growth in Income Tax receipts, not to mention the recent increase in inflation, mean that it is unlikely that revenues will keep pace with spending pressures.
"The Scottish Government will therefore have to either take the axe to certain areas of spending, signal higher levels of taxation - or ignore the issue for now, hoping for extra funding or borrowing powers from the UK Government."
Ms Forbes was speaking ahead of tomorrow's publication of Holyrood's resource spending review.
She said that prioritising public spending is essential to grow a stronger economy as Scotland recovers from the pandemic and faces up to the cost-of-living crisis.
The spending review will give broad parameters for spending for the next four years and set out a series of government reforms.
Ms Forbes added: "These are challenging times, and we need to be canny with our spending, but I'm confident that if we work together we can get through this cost-of-living crisis and still achieve our ambitions.
"That means tackling child poverty, driving our economic recovery from Covid and achieving net zero, while building a stronger public sector that is sustainable for the future.
"We face a very difficult financial position over the next few years with funding increases below inflation levels and the challenge of recovering from the pandemic without the financial tools available to every other government in the world. That means while the spending review is not a budget it will include difficult decisions to ensure we can really focus on supporting households and services at this time."
The IFS comments that the next four years will be far from the best of times.
It adds: "A series of factors have heightened the already-delicate trade-offs facing the Scottish Government.
"Some of these are of its own making. In particular, the Scottish Government has made a number of expensive policy commitments, especially in relation to recently-devolved social-security powers.
"As of last December, the Scottish Fiscal Commission was forecasting that Scottish social security spending was set to exceed the funding provided by the UK Government by at least £750million and potentially more like £1billion per year by 2026-27. This means less money for public services or higher taxes than otherwise would be the case.
"But factors that lie largely or entirely outside of the Scottish Government's control also create difficulties.
"First, relatively-slow growth in the Income Tax base in Scotland relative to the rest of the UK is an increasing drain on the Scottish Government's budget.
"For example, despite changes to devolved Income Tax rates that overall were estimated to raise an additional £500million, the Scottish Fiscal Commission forecast in December that the revenues the Scottish Government will receive this year will be £190million lower than if income tax had not been devolved.
"The Commission expects slower growth in employment in Scotland - partly linked to a more-rapidly-ageing population - to increase this shortfall over the next few years.
"And, added to that, the Scottish Government will have to repay funding it received as a result of recent Scottish tax forecasts being overly-optimistic - with an estimated repayment of £470million in respect of 2021-22 falling due in 2024-25. The Scottish Government will be able to borrow up to £300million to help cover the cost of addressing these forecast errors, but that borrowing will have to be repaid eventually."