2024-25 has been a financial year of tribulations in terms of the Scottish Government’s ability to adhere to its legally binding requirement to balance its resource budget. When we presented our 2023 Budget Report, we highlighted the challenges that were likely to come in the year ahead. As a result of these challenges,  the 2024-25 Budget included some increases in tax, as well as cuts to a number of programmes.

We have not had a medium-term financial strategy (MTFS) this year – it was first delayed due to the election of a new First Minister, and then due to the UK General Election. The MTFS allows the Scottish Government to set out medium-term (5-year) spending plans.

The Finance Secretary then wrote to the Finance and Public Administration Committee (FPAC) indicating the 2024-25 edition of the MTFS would be cancelled, and instead one would be presented after the conclusion of the UK Government’s Spending Review in the Spring (although given that the SR will be concluded in “late Spring”, there are reasonable concerns that there won’t be one in May 2025 either). However, on the basis of the last published MTFS (and highlighted by the Auditor General today), pressures would seem to be growing year-on-year, which was exactly the backdrop that made this such a challenging year.

On 13 August, The Times broke a story on emergency spending controls imposed by the Scottish Government, which were confirmed in a statement to Parliament on 3 September. This is the third year in a row in which there has been an emergency budget review. As we mentioned at the time, while some of the reasons for this were to do with the fact that the Chancellor of the Exchequer chose (at the time) to fund some of the pay awards out of existing budgets, a significant part of the story was the lack of contingency built in for higher pay awards in Scotland when the 2024-25 Budget bill was passed. The Minister for Public Finance admitted as much in a recent FPAC session, and the impact of the Scottish Government’s decisions on its challenging budget position has been highlighted by recent reports from the Scottish Fiscal Commission and Audit Scotland.

Despite this – the ABR did include significantly higher spending

The Scottish Government set out in its Autumn Budget Revision (ABR) how it would spend a significantly higher level of funding from Barnett consequentials from the Spring Budget, and which came too late to be included in the Budget bill. These amounted to £731 million, although about £437 million were to do with additional spending on pension contributions and therefore aren’t really discretionary spending. But this still left about £293 million in additional spending power.

The Scottish Government also announced plans to draw down an extra £162 million from the reserve and it incorporated £224 million of ScotWind proceeds to cover the budget shortfall. This is below the £460 million announced by the Finance Secretary on 3 September, and reflects its announced intention of not using all ScotWind proceeds if possible.

The ABR included nearly all of the itemised savings from the 3 September statement plus significant additional income (mostly from Barnett consequentials since the Budget Bill was passed in February), although not the impact of the emergency spending controls. But it also showed even greater levels of spending additions, which totalled £1.5 billion. Given that the ABR didn’t specifically make allowances for the higher pay settlements that were being negotiated apart from teachers and social care workers, this would appear to imply that other pay pressures would be additional – and so we’ll come back to those later.

For now, a reading of the ABR would imply that even after these itemised savings, there would still be around a £400 million shortfall in funding to cover the spending plans budgeted for.

Chart 1: Evolution of the Scottish Government resource net funding position

Source: Scottish Government, FAI analysis

A large increase in UK Government spending changes the equation considerably

The UK Budget presented on 30 October brought along a large increase in public spending – particularly in terms of departmental spending, and with health and education being the largest initial beneficiaries.

With these being devolved areas, they brought with them significant Barnett consequentials. As some of the spending allocations at UK Government level are for this year, this means an additional £1.4 billion for the Scottish Government in 2024-25 – meaning that on an ABR plus UK Budget basis, the net funding position would be a surplus of £1 billion. This is a significant level of additional funding, and will make the challenge of balancing the Scottish Budget significantly easier.

What about pay deals?

Some pay deals have been announced already and incorporated into the ABR. This included £242 million for the teachers’ pay award and £230 million for the pay uplift for social care workers. Both of these are actually paid out by local government, and so this funding has been put through into higher grants to local authorities.

The additional funding has been necessary because these awards exceeded the planning assumption included by the Scottish Government, which – if we go by the announced pay policy, itself only published on 30 May – was only 2% from 1 April and another 1% from 1 January, which means an effective 2.3% increase for the full year.

Assuming no changes to total workforce numbers, the 2.3% increase for central government staff only (which includes, among others, civil servants, NHS workers and prison officers) would have meant a cost of £330 million.

Every additional 1 percentage point in pay growth costs the Scottish Government £140 million just for its central government staff. And pay deals (both already agreed and currently under negotiation) are in most cases well in excess of the 2.3% that (again, we think) was budgeted for. For example, the agreed NHS pay deal is 5.5% and the proposed Police pay uplift is 4.75%.

We don’t yet know for sure what the final pay awards will be in total – and there might yet be some movement in total employment numbers – but an average increase in pay for central Scottish Government staff of 4.5% (which seems fairly plausible, especially given how large a share of employment the NHS constitutes) would cost an additional £315 million.

So will the Scottish Government need to use the ScotWind proceeds and the Scotland Reserve?

We can’t really know for sure, but the chart below illustrates what the resource net financial position might look like for different scenarios of pay growth and usage of ScotWind proceeds and the Scotland Reserve. In all cases, the Scottish Government should be able to balance its resource budget without needing to resort to these extra funding streams – but of course, that would be in the absence of any other pressures.

Chart 2: Scenarios for resource net financial position using different pay growth assumptions

Source: HM Treasury, Scottish Government, FAI analysis

 

What would the impact be of restoring the universal winter fuel payment?

In recent days, there have been suggestions that the Scottish Government might look to reinstate the universality of the Pension Age Winter Heating Payment (PAWHP, the Scottish Government’s equivalent of the UK Government’s Winter Fuel Payment). How would these scenarios look if that were to be taking into account? Chart 3 illustrates this, using the same assumptions for all other spending streams and assuming the cost of extending PAWHP is £148 million, as estimated by the Scottish Fiscal Commission.

Chart 3: Scenarios for resource net financial position using different pay growth assumptions assuming universal Pension Age Winter Heating Payment is restored

Source: HM Treasury, Scottish Government, Scottish Fiscal Commission, FAI analysis

Of course, there are considerations that the Scottish Government might want to take into account when deciding whether to restore universality of PAWHP other than just whether it’s affordable this year – especially in terms of further increasing the size of its DEL-like budget that is demand-driven. So we await to see where the Scottish Government’s balancing of risks and priorities ends up regarding this policy.

A note on transparency

This is one of our recurring themes, and sadly one we have to return to on this occasion. It’s also one echoed by Audit General in the report published this morning.

Unfortunately, we have once again had to try and piece together what the in-year position might be given a number of different sources – including having to make judgements about a number of lines in the ABR guide among many other transfers that appear to be business-as-usual rather than unexpected changes, and therefore one might question why they aren’t budgeted in the correct place of expenditure in the first place – rather than being able to scrutinise Scottish Government figures directly. We hope that the Scottish Government will move towards making this scrutiny easier by increasing the transparency of its publications.