As we approach the Christmas break, we bring you our very own present: the start of our Budget Report preview series. We start with a look at claims of the Scottish Government balancing its budget, and what happened in the Autumn Budget Review.
We’re heading off on our break, but we’ll pick these back up in early January. Look out for them in our feed, and we hope you have a great Christmas.
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It has almost become a ritual – an article of faith that is repeated endlessly in the Scottish Parliament. Just in the last 18 months, between the Finance Secretary, the Minister for Public Finance, the Social Justice Secretary and the Deputy First Minister, there have been no fewer than 16 instances[1] in the Official Report of a minister saying “we balance our budget” every year.
But how true is that, and how meaningful a statement is it?
What does a balanced budget mean?
First of all, an interested observer will be surprised to hear that the apparent definition used by the Scottish Government of a balanced budget includes borrowed funds.
When the Budget Bill is set out and in outturn, the Scottish Government’s expenditure plans are “funded” and fit within the limits set out. That’s of course what a budget is – it does not make it balanced in any meaningful sense, especially when part of the funding is through loans.
If I put some purchases on my credit card to fund my spending, I could hardly claim to have balanced my monthly budget. I may have found a way to finance it, but it’s borrowing all the same. This of course would tell us nothing about the desirability of borrowing or not – just as the statement that the Scottish Government puts front and centre of its budget says nothing about the desirability or suitability of its financial management policies.
The Finance Secretary in particular said in March that “[u]nlike the UK Government, the Scottish Government must balance our budget every year. That is what we will do, as we have done for every one of the past 17 years.” But of course, this is an apples and oranges comparison. By the Finance Secretary’s definition, the UK Government also balances the budget – in the sense that it borrows the amount needed to fund the expenditure it sets out. So either both budgets are balanced, or neither is.
We need to think in terms of underlying funding and sustainability
A much more interesting question would be to what extent the Scottish Government’s underlying and recurring funding is enough to cover the expenditure incurred – and if not, to what extent the Scottish Government has used borrowing and exceptional items to plug its underlying deficit.
This is because borrowing incurs ongoing costs and the principal will need to be repaid when the term of the loan expires. This can be rolled over, but rolling over debt (a) is not new borrowing in net terms and (b) has an additional cost in the form of interest. And exceptional items are by their very nature non-recurring, and therefore cannot be counted on indefinitely to make the sums add up.
When we look at the last three years – including the latest view from the Autumn Budget Revision (ABR) for 2025-26 – it’s clear that the Scottish has not in any meaningful sense balanced the budget in every year.
Table 1: Actual and underlying net position in the Scottish Budget
| £m | 2023-24 | 2024-25 | 2025-26 |
| Funding | |||
| Resource | 46,156 | 49,027 | 52,546 |
| of which borrowing and non-recurring | 792 | -515 | 1,041 |
| Capital | 5,957 | 6,048 | 7,230 |
| of which borrowing and non-recurring | 330 | 251 | 844 |
| Financial transactions | 395 | 102 | 192 |
| of which borrowing and non-recurring | 45 | -21 | 25 |
| Ring-fenced | 6,525 | 5,848 | 4,875 |
| Total | 59,033 | 61,026 | 64,843 |
| of which underlying | 57,867 | 61,310 | 62,933 |
| of which borrowing and non-recurring | 1,166 | -284 | 1,910 |
| Total expenditure | 58,460 | 61,312 | 64,527 |
| Net position | 574 | -286 | 316 |
| Underlying net position | -593 | -2 | -1,594 |
| Underlying as a share of expenditure | -1.0% | 0.0% | -2.5% |
Source: FAI analysis of SFC and Scottish Government budget and budget revision documents
As table 1 shows, what has in fact happened is that apart from 2024-25 – in which the Scottish Government essentially balanced the budget and put some additional funds into the Reserve, it has a significant underlying deficit. This was around £600m in 2023-24, and has grown to £1.6 billion in the latest plans from the ABR.
How has the Scottish Government been able to make sums add up so that it can cover its expenditure? Essentially by making significant use of non-recurring items and by borrowing. Note in particular in table 2 that this year the Scottish Government plans (according to the ABR) to use the best part of £2 billion non-recurring items to pay for in-year spending, which more than £1 billion coming on the resource side. This includes using a large positive reconciliation, drawing down on the Scotland Reserve by £500 million and using £23 million of ScotWind[2] proceeds to finance current expenditure.
Table 2: Breakdown of borrowing and non-recurring items used in funding Scottish expenditure
| £m | 2023-24 | 2024-25 | 2025-26 |
| Scotland Reserve net drawdowns | 325 | -145 | 557 |
| ScotWind | 310 | 0 | 364 |
| Borrowing | 341 | 139 | 472 |
| Reconciliations | 46 | -338 | 500 |
| Budget Cover | 145 | 60 | 18 |
| Total borrowing and non-recurring items | 1,166 | -284 | 1,910 |
| of which resource | 792 | -515 | 1,041 |
| of which capital and FTs | 374 | 230 | 869 |
Source: FAI analysis of SFC and Scottish Government budget and budget revision documents
Again, this is merely an assessment of the underlying figures and of the budget practices of the Scottish Government. It is a political choice as to whether the expenditure it funds is desirable. But it’s hard to see how this is commensurate with fiscal sustainability and prudent financial management. For example, the SFC forecasts significantly negative reconciliations in 2027-28 and 2028-29, and not adequately planning for that might cause the Scottish Government to divert funding for those rather than isolating public services from the volatility of reconciliation-related payments.
It illustrates the fact that the medium- and long-term pressures on the Scottish public finances that have been in every Medium-Term Financial Strategy (MTFS) as a distant problem are in fact already manifesting themselves. The Scottish Government has had to raid these other sources of unpredictable and finite funding to paper over them. But a £1.5 billion underlying deficit is not sustainable, and will therefore mean tough decisions on 13 January and for whoever is in power after May.
The Autumn Budget Revision, or how not to be transparent
Every year, the Scottish Government produces two major revisions to its in-year budget. The ABR has already been presented, and after a number of movements towards more transparency in recent times (for example, the change in baseline for comparison at the Budget and the publishing of assumptions underlying the MTFS), there was a disappointingly large number of movements across portfolios.
At the Minister for Public Finance’s appearance before the Finance and Public Administration Committee on 11 November, the Convener criticised this pattern heavily. The Committee has long asked the Scottish Government to be more transparent and to allocate these monies to the portfolio where they will eventually be spent.
We agree strongly with the Convener, and remain unconvinced by arguments put forward about policy and delivery portfolios. These are on the main predictable transfers, and even if they turn out to be slightly different at the end of the year, the transparent and sensible thing to do is to include the best estimate of the spending in the portfolio where it will end up anyway.
Instead, we got another set of large transfers within the Scottish block, which will continue to make comparison across years and within year challenging, and will again distort comparisons come 13 January.
Table 3: Portfolio reallocation transfers in the 2025-26 Autumn Budget Revision
| Movement | Budget portfolio | ABR portfolio | £m |
| Transfers to Scottish Funding Council transfers for health and medical education | Health and Social Care | Education and Skills | 73 |
| Social care spending funding | Health and Social Care | Finance and Local Government | 560 |
| Discretionary Housing Payments | Social Justice | Finance and Local Government | 79 |
| Funding for the teachers’ pay award | Education and Skills | Finance and Local Government | 240 |
Source: Scottish Government
These are mostly recurring transfers, which could and should be baselined. In January, the Cabinet Secretary said she was committed to baselining more regular transfers – here’s hoping this proves to be the case next month, although we won’t necessarily hold our breath. It was good to see the move towards using ABR positions as comparisons in the Budget tables, but now we need the Scottish Budget to actually budget based on how and where the money is spent, as would be expected by any interested observer.
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[1] See below (all accessed 19 December 2025):
[2] The remaining £341 million of ScotWind proceeds planned for use in 2025-26 will be used for capital spending, which was the original intention for the totality of the proceeds.
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.
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.