More on the 2026-27 Scottish Budget

Summary

FAI Director Mairi Spowage and Deputy Direction João Sousa join economist Hannah Randolph to talk through our immediate reaction to the Scottish budget statement. We discuss what was announced and what the tax policies in particular mean for Scottish taxpayers. We also cover areas of confusion about how much spending will change in different areas and some of the fiscal sustainability challenges facing the Scottish Government.

Notes

Timestamps

(0:30) Overview of the Scottish budget

(5:02) Fiscal sustainability

(10:28) Clarity of planned transfers between portfolios

(14:00) Future spending plans

Transcript

00:00:08 Hannah Randolph

Hello, and welcome back to our latest Fraser of Allander podcast.

00:00:10 Hannah Randolph

I’m Hannah Randolph, an economist here at the Institute, and today I’m joined by Director Mairi Spowage and Deputy Director João Sousa to talk about the Scottish budget.

00:00:18 Hannah Randolph

Shona Robison delivered the budget statement yesterday, and in the first line of your reaction, Joao, you’ve written that the devil was very much in the detail and in what wasn’t said by Shona Robison.

00:00:28 Hannah Randolph

So we’ll get into some of that detail in a minute.

00:00:30 Hannah Randolph

But first, could you run us through the main budget announcements?

00:00:32 João Sousa

Sure.

00:00:33 João Sousa

So a few things were big parts of the

00:00:36 João Sousa

of the budget speech, it included things like a so-called mansion tax, which is introducing new council tax bans for properties above 1 in 2 million pounds in valuation, including a revaluation for those properties.

00:00:49 João Sousa

That is something that isn’t actually, it seems, going to be Scottish Government revenue, will be local government revenue, and it’s not coming in for a while.

00:00:58 João Sousa

There was some discussion about air departure tax and taxes on private jets.

00:01:02 João Sousa

That also seems to be further down the road and there’s no costing for it, but we don’t think that’s going to raise much revenue.

00:01:08 João Sousa

And in kind of a theme of things that aren’t as big as they might seem, there was a cut to income tax by raising some of the thresholds well above inflation and average earnings, and that’s in particular the

00:01:20 João Sousa

basic and intermediate rate thresholds, the point at which you start paying 20% rather than 19% and 21% rather than 20% on your income.

00:01:28 João Sousa

Both of those are obviously welcome for the people who benefit from it, but they don’t benefit that much from it.

00:01:34 João Sousa

The maximum benefit is about 32 pounds a year or 61p a week, which isn’t, you know,

00:01:43 João Sousa

You’d rather have it than not, but it’s not revolutionary amounts of money.

00:01:47 João Sousa

There were a few other announcements that also don’t kick in immediately, like the increase in Scottish Child Payment to 40 pounds a week for under ones.

00:01:57 João Sousa

So that’s going to take a while to come through. Scottish Fiscal Commission thinks about 18 months.

00:02:02 João Sousa

Again, there’s some very good reasons for that, and that’s welcome for the people who will be getting it, but it’s relatively few

00:02:11 João Sousa

kids that this will apply to, and it doesn’t actually cost that much money.

00:02:15 João Sousa

So in some sense, the theme of the budget is there wasn’t that much largesse, probably, well, because of the fiscal environment is very tight, as we’ll come to discuss, I’m sure.

00:02:26 João Sousa

And therefore, there were kind of these small policies that will either not apply immediately, or if they do apply immediately, they have a relatively small effect, but they were kind of the big flagship policies that were in that.

00:02:40 Mairi Spowage

Yeah, I think that’s fair, that, you know, there was a lot of fanfare about the fact that, you know, they were making these threshold adjustments above inflation and the 32 pounds a week benefit is compared to if she had raised them by inflation, just to be clear.

00:02:57 Mairi Spowage

And that’s different to the comparison to taxpayers in the rest of the UK, which is confusing people.

00:03:04 Mairi Spowage

You know, so they are relatively small impacts on

00:03:09 Mairi Spowage

everybody’s sort of take home pay and you know, they do benefit, you know, sort of everyone up the income distribution above those thresholds.

00:03:17 Mairi Spowage

Everybody gets it, which is why it costs 60 million pounds.

00:03:21 Mairi Spowage

You know, people are only benefiting to the tune for this policy measure of £32 a year.

00:03:28 Mairi Spowage

A lot of it, even the budget announcements on things like business rates were

00:03:33 Mairi Spowage

you know, sounded quite like they were quite a lot, but if you look at how much they actually cost the government, they are actually fairly small policy measures in the end.

00:03:42 Mairi Spowage

Yeah, and the scope of, you know, 50 to 60 billion pound budget kind of depends exactly what you include.

00:03:50 Mairi Spowage

Shona obviously includes everything to come to the 68 billion pound figure that she said yesterday, including stuff that’s funded locally.

00:03:56 Mairi Spowage

These sorts of figures are very small, even though, as she says, obviously things like the child payment going up for

00:04:03 Mairi Spowage

People who have kids under one will be welcome for those families, but it is a very small measure and targeted at quite a few people.

00:04:08 Mairi Spowage

So quite a lot of largesse in the speech, but you look at the measures involved and actually, whilst eye-catching, certainly things like the private jet tax, they’re pretty small fry in the comparison of the overall budget.

00:04:21 Hannah Randolph

And this is all in response to a really difficult funding position going into the budget.

00:04:25 Hannah Randolph

So in some of the…

00:04:28 Hannah Randolph

stuff that we’d put out ahead of the budget, you’d pointed out that Scottish Government needed to make cuts to day-to-day spending and amend their previous plans for capital spending.

00:04:37 Hannah Randolph

So you’ve both written and talked a lot about fiscal sustainability and expressed concern that the Scottish Government is not necessarily living up to their claims about putting Scotland on a sustainable financial footing.

00:04:48 Hannah Randolph

So what kind of fiscal position were we actually in going into the budget and did you see signs of moving towards more fiscal sustainability?

00:04:56 João Sousa

The situation is very, very tricky, particularly on capital.

00:05:00 João Sousa

We had plans, you know, they’re indicative plans, of course, but the…

00:05:04 João Sousa

The medium-term financial strategy plans in June, they kind of had how much the Scottish government intended to spend or had planned to spend on capital and on day-to-day spending.

00:05:14 João Sousa

So on capital, there was a gap that was nearly a billion pounds.

00:05:19 João Sousa

Now, they decided to borrow a little bit more for capital spending, but they are limited on how much they can under the fiscal framework.

00:05:27 João Sousa

And they’re kind of maxing out how much they can borrow next year.

00:05:32 João Sousa

And that still includes kind of about 850 million compared to what they said they wanted to spend.

00:05:39 João Sousa

And that’s kind of what we said was going to have to happen.

00:05:44 João Sousa

Because you can’t spend money, you don’t have.

00:05:48 João Sousa

If you’re trying to fund this spending, there’s only so much that you can borrow.

00:05:52 João Sousa

Ultimately, it’s the plans that are going to have to take the brunt.

00:05:54 João Sousa

We are still working through some of the infrastructure delivery and development plans, but it certainly seems like there’s a few things that don’t move to the right, as we say, so they’ll be delivered later.

00:06:07 João Sousa

They might just sit in the back burner for a bit, so there’s this

00:06:12 João Sousa

a list of projects that’s in the infrastructure development pipeline rather than delivery, which sounds a bit like a euphemism for things that you might like to do if you had more money, but you know, you can’t commit any funds to at the moment.

00:06:25 João Sousa

On day-to-day spending, the situation wasn’t as bad as it could have been because there was some additional funding that came from the UK government.

00:06:32 João Sousa

But it’s not comfortable either.

00:06:34 João Sousa

Ultimately, what the Scottish government has had to do, especially in response to some weaker than expected, weaker than previously forecast, tax revenues

00:06:42 João Sousa

is that they’ve had to adjust down their plans on spending.

00:06:46 João Sousa

They’ve also kind of raided as much as they could, these little pots of money that kind of allow them to finance the budget.

00:06:54 João Sousa

But still, you know, they’re essentially running an underlying deficit and have been in most years recently.

00:07:00 João Sousa

And so they’re using things like a positive reconciliation from a few years ago.

00:07:04 João Sousa

They’re using some crown estate funding.

00:07:07 João Sousa

So that’s the

00:07:09 João Sousa

the revenues from things like ScotWind, for example.

00:07:12 João Sousa

I don’t know exactly if this one is from the ScotWind pop up, but it’s from the current state revenue, which is, you know, it’s not necessarily ongoing revenue that you have for this.

00:07:23 João Sousa

They’re distributing more non-domestic rates over and above receipts from the pool.

00:07:29 João Sousa

They’re drawing down on the Scottish reserve, Scotland reserve.

00:07:33 João Sousa

So it’s kind of using all these

00:07:35 João Sousa

pots of money to make things add up.

00:07:36 João Sousa

But that doesn’t really confront the underlying picture, which is that spending plans still look very tight.

00:07:41 João Sousa

And one of the things that appears that they have done, Mairi, you might want to comment on this, is in terms of spending on different portfolios.

00:07:49 João Sousa

So one of the things that they did was the fiscal sustainability delivery plan that was presented in June, which was to try and get some efficiency savings.

00:07:58 João Sousa

I don’t think there’s still much detail on that.

00:08:01 João Sousa

And particularly one of the things that always drives spending up is health.

00:08:05 João Sousa

because we’re an aging population, the health service is still recovering from the pandemic.

00:08:11 João Sousa

So you might have expected a relatively strong level of spending growth in health.

00:08:17 João Sousa

That is not what we’ve seen.

00:08:19 João Sousa

So particularly on health,

00:08:22 João Sousa

The Scottish Fiscal Commission have highlighted that there’s only a growth in real terms of 0.7% next year, which seems very low compared with historical levels of growth, and it might be difficult to deliver.

00:08:37 João Sousa

I don’t know what your reflections are, Mairi.

00:08:39 Mairi Spowage

Yeah, I think one thing I’d say is that the Fiscal Commission have produced a table as part of their documents that they produced alongside the budget yesterday, which does something really helpful, which we had a big grump about before the budget,

00:08:52 Mairi Spowage

which was it adjusts for these adjustments that the government makes every single year to reallocate monies from particular portfolios that they announce in the budget to where they’re actually going to be spent.

00:09:05 Mairi Spowage

So a classic example of this would be…

00:09:08 Mairi Spowage

They include the spending on doctor and nurse training in the health budget, and then they transfer it to the education budget where it gets delivered.

00:09:15 Mairi Spowage

This happens every single year.

00:09:17 Mairi Spowage

This is not what the UK government would do.

00:09:18 Mairi Spowage

They would have it in the department that spends the money.

00:09:21 Mairi Spowage

And essentially it can be a way for the government to be cynical, say their spending or the growth in spending on health is changing at a different rate than if you actually looked at what they spend on health as a government function.

00:09:33 Mairi Spowage

So we think it’s not transparent and that what they should do is baseline those transfers they  make

00:09:38 Mairi Spowage

every single year so that we know what’s happening.

00:09:40 Mairi Spowage

And what’s happened in the last two budgets is the government have agreed that they should use the latest position on government spending for the current year that we’re in.

00:09:49 Mairi Spowage

to compare to the budget so that you have the most up-to-date position and don’t look back to the previous budget, which is good because there’s so many in-year transfers now that it does make it much better to see what is the latest understanding of what we have spent in this year or what we’re likely to spend in this year on different things.

00:10:06 Mairi Spowage

But what they’re doing, because they have these transfers not done yet in the budget they’ve presented, it makes it very difficult to actually compare across portfolios to say how has what we’ve spent on health in the current year changed as we look

00:10:19 Mairi Spowage

ahead to the next year, which just feels to me like a ridiculous position to be in.

00:10:23 Mairi Spowage

And we should be able, as a government, to be able to understand how much spending is changing from what we’re going to spend on health this year to what we plan to spend next year.

00:10:35 Mairi Spowage

So what the SFC have done in figure 2.8 in their document

00:10:40 Mairi Spowage

is they’ve made those transfers.

00:10:42 Mairi Spowage

They’ve sort of said, if the transfers happen as expected, this is what the growth and spending on health is likely to be.

00:10:47 Mairi Spowage

And it does make the spending growth look very different than if you don’t make that adjustment.

00:10:52 Mairi Spowage

So, I mean, we would urge again that the Scottish Government make the next step on presentation of their budget and baseline these transfers.

00:11:00 Mairi Spowage

The arguments that have been given for it, as we said in our blog on the 19th of December, if anyone’s interested, are incoherent.

00:11:07 Mairi Spowage

and don’t stand up to any scrutiny and would add greatly to the transparency of the budget on budget day and wouldn’t allow these sorts of obfuscations to cloud what’s actually happening.

00:11:18 Mairi Spowage

Sorry, that’s my rant over about baselining these transfers.

00:11:23 Hannah Randolph

Speaking about spending plans.

00:11:25 Hannah Randolph

So quite a lot of stuff came out alongside the budget yesterday, one of which was the spending review.

00:11:30 Hannah Randolph

So the spending review summarizes the government spending plans across different portfolios for the next few years.

00:11:36 Hannah Randolph

So understanding that neither of you may have had much time to look at this in detail, from what you have seen in the spending review, do you have any concerns about what’s in there?

00:11:44 Mairi Spowage

I think I’d say overall that it looks like it’s very challenging.

00:11:49 Mairi Spowage

So for those who are interested, Annex A has the overall portfolio spending plans over the next few years.

00:11:55 Mairi Spowage

And you can see quite quickly the challenges that are emerging.

00:11:58 Mairi Spowage

While there are increases in cash terms to the health portfolio over the period, health and social care portfolio over the three years, increases in social justice, which includes social security payments, the settlement for local government over that period of time looks

00:12:13 Mairi Spowage

really challenging.

00:12:14 Mairi Spowage

So there’s an actual cut in cash terms between 26-27 and 27-28, and then it’s basically flat cash after that.

00:12:21 Mairi Spowage

So obviously in real terms, that’s significant cuts to local government funding that are planned over the spending review period.

00:12:27 Mairi Spowage

Also, justice looks really difficult.

00:12:29 Mairi Spowage

I mean, there’s big cuts in cash terms, half a billion pounds cut in cash terms over the three-year period.

00:12:35 Mairi Spowage

So you know what that’ll mean in real terms in terms of public services.

00:12:39 Mairi Spowage

Now, there is a lot of detail in this 81 page document that I have not gone through yet.

00:12:44 Mairi Spowage

And we also need to understand the implications of the transfers that I just ranted about, you know, to what extent those predictable transfers might change the picture a little bit, particularly for health or local government.

00:12:56 Mairi Spowage

But I think overall, it looks very challenging to deliver these sorts of spending plans.

00:13:00 Mairi Spowage

And the stuff in the annex is about

00:13:03 Mairi Spowage

the way that the plans on efficiencies and workforce reduction are going to sort of help deliver this, you know, don’t to me look detailed enough yet to really understand whether they’re credible.

00:13:14 Mairi Spowage

Now, as you say, we haven’t had a lot of time to look through them, but it just looks really hard and really challenging for whoever’s in government after the election.

00:13:23 Mairi Spowage

Everything looks very tight.

00:13:24 João Sousa

Yeah, I think it very much–

00:13:26 João Sousa

I mean, I appreciate this is a really difficult position, right?

00:13:29 João Sousa

The Scottish Government is conducting a spending review at

00:13:33 João Sousa

a time that it probably isn’t the time they would have picked if they had free reign in terms of when to do it, because we’re just a few months out from an election.

00:13:44 João Sousa

But making this add up appears to rely a lot on assumptions about efficiencies that, as you said, don’t seem that detailed from the first look that we’ve had.

00:13:55 João Sousa

I mean, ultimately, politicians always

00:13:58 João Sousa

like saying that they’re going to protect the front line and that they’re going to make cuts on inefficiencies in the back office where no one will notice.

00:14:07 João Sousa

But I struggled–

00:14:09 João Sousa

So the finance secretary was on STV yesterday saying that there were going to be a lot more shared services.

00:14:17 João Sousa

And that’s the sort of thing that we always hear.

00:14:19 João Sousa

But the Scottish Government already has lots of shared services, that it doesn’t have a…

00:14:24 João Sousa

departmental structure like Whitehall does, for example.

00:14:27 João Sousa

So how much more can you save from just efficiencies before they become fewer services?

00:14:36 João Sousa

And that is the tricky thing is that you cannot necessarily present these

00:14:42 João Sousa

these plans as protecting everything because that’s just not realistic.

00:14:47 Mairi Spowage

Yeah, absolutely.

00:14:48 Mairi Spowage

It’s very hard to see the route to spending half a billion pounds less in cash terms in two years’ time on the justice system and that not impacting on people.

00:14:59 Mairi Spowage

people’s experience of interacting with the justice system or the services they get.

00:15:03 Mairi Spowage

Given all of the, you know, inflationary pressures there’ll be, wage increases, other things, it’s really hard to see how that’s possible.

00:15:10 João Sousa

And the backlogs and the prison situation, all of that is in that portfolio.

00:15:15 João Sousa

It’s really challenging.

00:15:16 Mairi Spowage

Now, of course, it’s within the government’s gift to cut the level of public service provision or change it, you know,

00:15:23 Mairi Spowage

If they’re in power, that is something they can do.

00:15:25 Mairi Spowage

Obviously, they’ll then have to face the electorate at the ballot box.

00:15:28 Mairi Spowage

But pretending that this is not going to have any impact on…

00:15:32 Mairi Spowage

It’s just not credible for me, given the plans that are presented.

00:15:36 Mairi Spowage

It does look very challenging.

00:15:38 Mairi Spowage

So it’ll be interesting to see how the different parties in the election campaign talk about what will their budget look like for 27/28 and 28/29.

00:15:47 Mairi Spowage

One would hope there’d be that level of detail in the discussion, probably not.

00:15:50 Mairi Spowage

To what extent, how are they going to tackle this fiscal challenge?

00:15:53 Mairi Spowage

which is pretty big for next year and the year after.

00:15:56 Hannah Randolph

That’s perhaps a request from us for campaigning parties is to provide, what would you say, like a level four summary of their spending plans for our convenience.

00:16:04 Mairi Spowage

Well, that would be great.

00:16:05 Mairi Spowage

That would make our job much easier.

00:16:07 Mairi Spowage

But I don’t suppose we should hold our breath for that.

00:16:10 João Sousa

I think that might not fit in the leaflet that they put through the doors.

00:16:15 Hannah Randolph

We’ll see what happens.

00:16:16 Hannah Randolph

And we will be doing election coverage as we move towards the Holyrood elections in a few months.

00:16:22 Hannah Randolph

So thank you both for joining me today.

00:16:24 Hannah Randolph

All of our commentary leading up to and responding to the Scottish budget can be found on our website, fraserofallander.org, and we will be putting out more analysis over the next week or so.

00:16:33 Hannah Randolph

So thank you all for listening.

00:16:34 Hannah Randolph

Until next time, we’ll see you then.