More than £700m is to be cut from the Scottish government's Budget next year, the country's official forecaster has said.

The Scottish Fiscal Commission (SFC) said the reduction - to correct the difference between forecast and actual income tax revenues - would lead to a drop in funding for services.

In its annual report, the body found that Holyrood ministers had an extra £831m to spend in the current financial year compared with earlier forecasts, largely thanks to a one-off boost from education spending south of the border.

However, the SFC warned there was "very little" new funding in 2027-28, coupled with a worsening economic outlook, higher inflation and weak household income growth.

Public Finance Minister Hannah Mary Goodlad said the Scottish government would "take a responsible approach to managing the public finances".

The Scottish Budget for the current financial year is about £70bn. The SFC noted that the overall change to that figure in 2027-28 would depend on the tax and spending decisions announced in the UK Government Budget on 28 October.

Prime Minister Andy Burnham has refused to rule out tax rises - which could have a direct impact on Scottish taxpayers, or knock-on effects for the Scottish Budget.

The SFC report revealed that £720m is to be cut from next year's Budget - to be announced by Finance Secretary Jenny Gilruth later in the year - because Scottish income tax revenues were lower than forecast, while the UK government's were higher than expected.

Under complex devolved funding arrangements, this will lead to what is known as a "negative reconciliation", with Holyrood's funding cut by the Treasury.

While the Scottish government can borrow £670m to make up the shortfall, it will need to find at least another £68m immediately, according to the Institute for Fiscal Studies. The SFC warned this could threaten funding for public services.

The change of leadership on Downing Street has resulted in some benefits for the Scottish government - including an extra £533m in 2026-27, and a further £300m in 2028-29, due to UK government spending decisions on education.

The SFC said that while funding for day-to-day spending has increased by 3.5% in real terms in the current financial year, it is expected to fall by 1.2% in 2027-28.

Scotland's capital budget - used for long-term infrastructure projects - is expected to suffer as a result of increased Treasury spending on defence, which is to be funded by reducing the capital budgets for all other departments.

While precise figures will not be known until the UK government budget is announced, the SFC provisionally forecasts that the adjustments will cut the block grant for capital spending in Scotland by £70m in 2026-27, £87m in 2027-28 and reaching £97m by 2029-30.

The SFC noted that the Scottish government - and in particular the NHS - would have to make rapid progress to meets its target of making £563m of savings in the current financial year.

The report also warned that improvements in Scottish living standards would "remain weak" over the next five years, with higher inflation threatening to reduce household incomes in real terms.

The SFC cautioned that Holyrood's spending power could be altered depending on the UK government's Budget, or its interpretation of the Treasury's fiscal rules.

Holyrood ministers have used devolved powers to create a distinct income tax system in Scotland, while the UK government sets income tax rates for England and Northern Ireland.

Under the Scottish system, higher earners pay more than they would south of the border, while lower earners pay slightly less.

The Scottish government keeps the income tax revenues it raises north of the border.

However, in its annual block grant to the Scottish government, the UK government deducts what it would have collected in income tax revenue had its rates been applied north of the border.

The latest Scottish income tax receipts, for 2024-25, were £209m lower than the SFC's forecast.

This, combined with higher than expected income tax revenue in England and Northern Ireland, means the amount the Treasury will deduct from the Scottish Budget has increased to a record £720m.

The SFC, which forecast Scotland's income tax figures, said the forecasting error was smaller than in previous years and that it was a "feature of the [UK's] fiscal framework".

SFC chairman Graeme Roy warned that the Scottish government would face significant challenges in trying to balance future budgets.

"The delivery of planned savings, managing workforce costs, and the impact of the upcoming UK Budget will all be important factors in determining the funding available for public services in Scotland," he said.

Roy called for ministers, when they return from parliamentary recess next week, to provide an update on progress towards savings "and to identify any new or emerging pressures" affecting upcoming budgets.

Goodlad, the public finance minister, insisted her government would "continue to take a responsible approach to managing the public finances, prioritising investment in frontline services".

She said: "Through progressive taxation and careful stewardship of the public finances, we are protecting those who are most vulnerable to these pressures and Scotland continues to provide the most comprehensive package of cost-of-living support in the UK.

"These are deliberate choices, but we are equally clear that they do not come at the expense of ensuring that public finances remain sustainable."

Goodlad added that £1.5bn of planned savings would be achieved through "workforce reform, productivity improvements and changes to how services are delivered".