Douglas Fraser
Business and Economy Editor, Scotland
All About Space
Scotland’s political parties are being challenged to tackle a £4.7bn hole that’s emerged in Holyrood’s budget plans.
The Scottish Fiscal Commission (SFC) says that’s the amount by which spending commitments outstrip the funds it forecasts will be available to ministers four years from now.
In its August update, the official public spending watchdog estimates that the day-to-day budget is on track to be £2.6bn short of commitments by 2029-30.
That is the larger part of the overall budget and covers the running costs of most public services as well as some welfare benefits. Half of that £2.6bn goes on pay.
The capital budget pays for housing, hospitals, schools, roads, bridges, energy efficiency in buildings, police vans, fire stations and flood prevention. It is £2.1bn short of declared commitments by 2029-2030.
These are big numbers, but scale matters. The £2.6bn is 4%, or one in every 25 pounds being spent that year on the day-to-day budget.
The capital shortfall of £2.1bn is 23% of the total, or nearly one in every four pounds committed.
The SFC’s chair, Prof Graeme Roy, says parties contesting next year’s election will have to figure out how they handle this.
They’ll have to do so, unlike Westminster, with very constrained powers to borrow money.
But the challenge falls first to Shona Robison, finance secretary in the Scottish government. She has to produce a draft budget for next year, when the looming gap is smaller but still daunting.
With £54bn in forecast revenue for day-to-day spending in the financial year starting next April, she faces a £963m overshoot.
With £7bn in revenue for capital spending, she has commitments of £1bn more than she has available.
But she’s committed also to producing a spending review. This should cover the subsequent years, when the gaps get bigger.
And some time this autumn, there’s also meant to be a long-delayed infrastructure plan, to set out where the government’s priorities lie and which of them is affordable.
The SFC reminds Robison that the costs of an ageing population (including health and social care) and the costs of climate change are only going to grow.
Will budget pressures lead to job losses?
Earlier this year, Robison set out a plan for getting the budget into sustainable shape, responding to repeated warnings that things had to change.
That meant a cut in the workforce of 0.5% per year for five years – roughly 12,500 jobs out of around 250,000.
It’s possible to do that by not filling vacancies, though the cut is meant to be achieved without affecting ill-defined front line roles.
But there are already unfilled roles in the NHS and teaching workforces. And the Scottish government has a track record of increasing the size of the public sector rather than scaling it down.
In every year since the Scottish Parliament began in 1999 the workforce under direct control of the Scottish government has gone up. And that’s happened at the same time as the digital revolution stripped out many roles.
NHS employment has gone up in less than 10 years from 130,000 to 160,000. In only six years, the size of the devolved civil service has gone up nearly 60%, and not only because of the creation of the Social Security Scotland agency.
And what’s more, the average Scottish public sector worker is paid more than their UK equivalent, thanks to more generous pay settlements. Ministers put a high value on avoiding strike action.
Robison’s intended constraint on this year’s pay bill allowed for increases of no more than 3%. But all the actual deals struck this year were above that, according to the SFC.
What is costing Scots so much?
Consumer price inflation is currently running at 3.8%, and that tends to drive pay claims as workers seek to maintain the spending power of their salaries, or exploit the scarcity of the skills they have.
The ‘Agenda for Change’ workforce, which is most of those in the NHS but not doctors, is getting 4.25% this year and 3.25% next year, as are prison staff. And if inflation takes off again, they will be further compensated for that.
So it’s proving far from easy to bear down on the pay bill.
The other commitments keeping the intended budget so far ahead of the actual one include the welfare benefits bill.
The UK Treasury gives Scottish ministers the amount of funding that would be paid to Scots if Westminster continued to have full control of the welfare system in Scotland.
Anything else has to be funded from somewhere else in the Scottish budget, or from a higher tax take.
The Scottish government pays out £600m for the Scottish Child Benefit. It’s an important tool in combatting child poverty, and is not available south of the Border.
It pays to mitigate decisions taken at Westminster on the two-child limit for benefits, and on cuts to winter fuel allowance. It was facing a hit of around £500m from changes to disability benefit set out by Chancellor Rachel Reeves.
The revolt by Labour backbenchers that forced a Downing Street U-turn is estimated to reinstate almost that much to the Holyrood budget.
Scottish ministers also wish to see their devolved benefits being offered more generously and with more dignity than the department for work and pensions, and then withdrawn less speedily when people are no longer eligible for them.
But that also comes at a price.
A recent review of disability payments suggested numerous ways to make it easier to claim them. But the ministerial response, due in the coming months, will also have to address the awkward question of their affordability.
Could Scots end up paying more tax?
So what about the other side of the tax and spend ledger – the amount raised in tax. Why not get the well-off to pay more?
Income tax is the devolved power that has most impact there, heading towards £20bn each year in Scotland.
Scottish ministers have already pulled that lever. And if other things stayed the same, they would be raking in £1674m more from Scots income tax payers than the UK Treasury would have done.
However, things don’t stay the same.
People adapt to incentives to put their income where it isn’t caught in the Scottish tax net. The tax base changes and grows at different rates from the rest of the UK.
It grew slightly faster while Scotland’s oil and gas workers were doing better with the surge in energy prices.
It may now be growing more slowly – according to the SFC – and it’s projected to fall further behind UK earnings growth. The Scottish and UK economies are forecast to see sluggish growth.
This year, instead of the £1671m extra that higher income tax rates and lower thresholds might have brought in, only £616m extra is being raised.
The difference, of more than £1bn, is the shortfall when tax increases on higher earners don’t deliver the result that’s wanted.
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Shona Robison’s spending plans are due later this year
These, then, are the constraints on Shona Robison as she prepares her draft budget for 2026-2027, her longer term spending review and her infrastructure plan, all due this year.
She will surely argue that much of this results from decisions taken at Westminster, over which Scots have little or no control.
But the challenge is not only to the SNP.
Any party which hopes to be a contender at the Holyrood election next May will have to set out its own plans.
These include the spending it wouldn’t continue with and any new priorities where it wants to spend more.
Ambitious projections of future economic growth might avoid some of the difficult choices.
But as we can see, it’s proving very hard to spark more life and growth into the economy. And such claims will have to work with a sceptical public.
