While UK Budget consequentials and economic developments have eased day-to-day spending pressures, Shona Robison will have her work cut out to decide how to plug a £1 billion-plus gap in capital spending plans she announced just over six months ago.
Rachel Reeves’ November Budget increased funding for next year by £300 million through the Barnett formula. Further improvements to tax and social security forecasts boost funding by an additional £450 million.
On current plans, the Scottish Government will use this one-off boost to offset an underlying deficit of around half a billion pounds in 2026-27 on the resource side of the ledger, continuing a years-long pattern of using exceptional items and non-recurring revenues to finance day-to-day spending.
But the gap on the capital side is too large to fill, and will require significant prioritisation. The Finance Secretary’s plans in June called for £8.1 billion of spending next year, well above the £7.1 billion available even after borrowing. We hope the long-awaited Infrastructure Investment Plan will explain to the public how projects have been prioritised – and crucially, which ones will no longer be going ahead and why.
This year’s report includes analysis of fiscal sustainability challenges faced by the UK and Scotland. It shows that once ‘fiscal drag’ – due to threshold rising more slowly than earnings – is accounted for over the long-term, taxes are already due to go up by over 8% of GDP in 50 years’ time, or £250 billion in today’s terms. But poor productivity growth means that still isn’t enough to bring the public finances onto an even keel.
The adjustment necessary at UK level is not too severe, requiring modestly bearing down on health spending growth and slightly increasing taxes. But the effects on the Scottish Budget would be quite severe. Because so much of the funding for the Scottish Government over the long run comes from health consequentials, the Scottish Government would be left short of good options to close its funding gap.
The already large gap currently projected by the Finance Secretary by 2029-30 is clearly unsustainable, and makes the challenge even more daunting. The tax rises required to plug the gap seem undeliverable, largely due to Scotland having fewer very high earners, and it’s hard to see how the Scottish Government could respond without having to cut spending.
The report also includes analysis of preventative budgeting, including the importance of getting outcomes and definitions right in order to deliver the Public Sector Reform and Fiscal Sustainability Delivery Plan announced last year, and previews what to expect from the Scottish Spending Review.
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.
Emma Congreve is Principal Knowledge Exchange Fellow and Deputy Director at the Fraser of Allander Institute. Emma's work at the Institute is focussed on policy analysis, covering a wide range of areas of social and economic policy. Emma is an experienced economist and has previously held roles as a senior economist at the Joseph Rowntree Foundation and as an economic adviser within the Scottish Government.
Ciara is a Knowledge Exchange Associate at the Fraser of Allander Institute. Her main area of focus is macroeconomic and fiscal analysis. She has recently completed a secondment to the Scottish Fiscal Commission, where she worked as an Economic and Fiscal Analyst in the economy team forecasting macroeconomic conditions.