Up to 60,000 public sector workers in Scotland could lose their jobs in the next few years, an independent review commissioned by ministers has found.
To help achieve spending cuts of £42bn over 16 years, the panel recommended a fall in public sector employment of between 5.7 per cent and 10 per cent by 2014-15. It called for reductions to be made as far as possible by natural wastage.
The Independent Budget Review report set out options for Holyrood to consider "in the face of the most challenging public spending environment since the Second World War".
According to the report, one in 10 public sector jobs would have to go if pay grew in line with UK plans, although this could drop to 35,000 (5.7 per cent) if a tougher approach to pay restraint was adopted.
The report recommended a two-year pay freeze from 2011-12 "as the first essential step to constrain growth in the public sector pay bill", which accounts for 60 per cent of spending in Scotland. It also called for a review of public sector pensions and a reduction in the number of public bodies.
The three-man panel also recommended subjecting all services – including the NHS – to scrutiny. It said there should be "no overriding presumption of protection for any of the major services".
The health service has an annual budget of about £11.5bn - approximately 30 per cent of public spending in Scotland.
The report said the prospect of ring-fencing health spending, as the UK Government has promised in England, would leave other departments in Scotland facing a budget cut of more than 20 per cent by 2014-15.
Universal or subsidised services such as free eye tests, personal care for the elderly and bus travel for the over-60s and disabled people should be reviewed, the panel said.
The council tax freeze, which has been in place in Scotland for the past three years, was described as unsustainable in the long-term by the Independent Budget Review Group. It said ministers should examine whether the freeze should be "discontinued".
On the issue of higher education, the panel also advised the government to consider implementing a system similar to England's up-front tuition fees.
The panel was led by Crawford Beveridge, formerly head of Scottish Enterprise, and its recommendations could shape the Scottish budget for 2011-12. Mr Beveridge said the report contained no "easy formula" for cuts, but instead set out a range of options.
"It's going to have to be a mixture of what they think they can achieve in efficiency, the overall pay bill, what can be done in terms of universal spending and capital spend," he said.
"They're going to have to take those and get to some reasonable picture."
Scotland's Finance Minister, John Swinney, said the government was committed to retaining free concessionary bus travel and free care for the elderly.
He said: "There are many options, but clearly there is no need to pursue all of these as they would generate far more savings than is actually required.
"We particularly welcome the review's recognition of the strongly held view, which we share, that water services should not be subject to privatisation.