Despite the increases in funding that have come as a result of the UK Government’s Budget on 30th October, the settlement for 2025-26 is still tricky for Shona Robison as she presents her Budget for 2025-26 next week, and she will have limited room for manoeuvre.
Significant consequentials have been generated from Rachel Reeves announcements – £1.5bn in 2024-25 (of which £1.4bn is resource) and £3.4billion in 2025-26 (of which £2.8bn is resource).
The Scottish Government have said that the funding provided in this year (2024-25) is already largely committed. If this is the case, the uplift in 2025-26 is under more pressure than it would appear. On the resource side, this would mean an uplift of £1.4bn in 2024-25 is being followed by a further uplift of £1.4bn in 2025-26.
Public sector pay makes up over half of the Scottish Government’s resource budget, and therefore the decisions made on pay will have significant bearing on the overall budget position. Obviously, pay recurs every year, and current and future 2024-25 pay decisions will have a big impact on the overall budgetary decisions.
The fact that public sector workers are, on average, paid more in Scotland, will mean that the challenges are even more acute (given a much larger public sector). The decisions on this, and on areas like social security, have put additional pressure on the Scottish Government’s budget.
Figuring out the funding position for next year has been much more challenging than usual. The lack of a Medium-Term Financial Strategy this year has made calculating this near-impossible, but we have set out the various pressures that the budget is likely to be under – including pay, the cost of employer National Insurance, the effect of non-recurring spending cuts, deferrals of spending into future years and higher block grant adjustments for tax.
We have included analysis of the impact of employer National Insurance rises on the Scottish Government’s Budget, and analysis of the cost to the Scottish Government of replicating the 40% retail, hospitality and leisure relief (RHL) announced by Rachel Reeves in Scotland.
This year’s report includes significant analysis of what Scotland spends its money on, to understand more about the discretionary power the government has to prioritise its budgetary decisions. We are grateful to the Joseph Rowntree Foundation for funding this strand of work, although the analysis was undertaken independently by the Fraser of Allander Institute.
This spending analysis highlights the fact that health spending, all other pay, social security and grants to local government makes up £7 in every £8 the Scottish Government spends day-to-day, which seriously limits their room for manoeuvre in changing the overall shape of the Budget.
Our analysis also finds that although spending on reducing child poverty – stated by successive Scottish First Ministers as one of the main, if not their utmost priority – has grown significantly since 2018-19, it would not be fair to say that it has become a large part of the Scottish Budget. It remains under 3% of all discretionary resource funding, and capital spending on child poverty reduction through the provision of affordable housing and urban regeneration has actually fallen by 13% in real terms since 2019-20.
Authors
João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.