The Scottish Fiscal Commission has published its latest economic and fiscal forecasts, estimating that total funding available to the Scottish Government in 2025-26 will be £59.6 billion, almost £800 million higher than in its December 2024 forecast.
“This is mostly because of additional UK Government funding and because the Scottish Government is expected to draw down money not spent in 2024-25 … ” said the Commission.
“The funding available for day-to-day spending is estimated to grow by 1.9 per cent in real terms in 2026-27.
“Growth slows to 0.6 per cent in 2027-28 and then returns to an average of 1.6 per cent over the remaining three years of the forecast. Despite this growth the pressures on the Scottish Government’s budget remain significant.
“Two of the key Scottish public sector pay deals already agreed for this year have been above the Scottish Government’s policy of three per cent, and the deal for most Scottish NHS workers is above the comparable pay offer for the rest of the UK.
“This is likely to create further pressure for ongoing negotiations in other parts of the public sector. There is also a knock-on effect for wage costs in future years.
“The challenges on pay are made more difficult by April’s rise in employer National Insurance Contributions. Although the Scottish Government has received £339 million of additional funding from the UK, this only covers between half to two thirds of the Scottish Government’s estimated additional costs from the tax rise.
“Recent UK Government announcements which reduce spending on Personal Independence Payment (PIP) in England and Wales are expected to reduce funding for the Scottish Government by £0.4 billion in 2029-30.
“This funding pressure comes on top of existing Scottish Government commitments on social security spending. By 2029-30 spending on social security will now be £2 billion more than the associated funding, reducing the money available for other areas.
“Further spending pressures have been added by commitments made in the recent Programme for Government, for example the permanent removal of peak-time rail fares. This will come into effect from September 2025 but was not included in the 2025-26 Budget Bill passed by Parliament in February this year.”
The Commission’s Chair, Professor Graeme Roy, said: “We need to wait until later in June to see the Scottish Government’s spending and funding plans, but what we do know now is that while budgets have improved slightly this year, spending pressures are also increasing with public sector pay, social security and other commitments.
“There are also longer term pressures in key areas like health and social care as a result of our ageing population, and the challenge of meeting net zero obligations that I have discussed in earlier reports.”
REACTION:
ICAS CEO Bruce Cartwright: “The five-year forecasts released by the Scottish Fiscal Commission today set out a picture of relative uncertainty and ongoing economic pressures for Scotland’s future.
“Total funding for the Scottish Government is expected to be nearly £800 million higher than forecast in December, with tax revenue also set to rise by £100 million. But in the wider context of mounting budgetary pressures, these gains amount to little more than a drop in the ocean.
“The UK Government’s decision to increase national insurance triggered a £330 million increase in the Scottish Block Grant, but this funding only covers almost half of what is needed. It remains to be seen how and where the Scottish Government will find the further £350 million required.
“Additionally, the budget is held to ransom by the key Scottish public sector pay deals that are still to be negotiated, with those already agreed for this year set above the Scottish Government’s policy of three per cent and higher than comparable offers in the rest of the UK. This pressure is made even greater by other commitments made earlier this month in the Scottish Programme for Government, including the abolishment of peak rail fares – projected to amount to £20 million this year and £40 million per year thereafter.
“The report also highlights a period of real wage stagnation in Scotland’s labour market, with average earnings projected to grow modestly over time, signalling a slow but welcome recovery in household income and purchasing power. This recovery, however, lags behind the rest of the UK, where wage growth is expected to be 0.8 per cent stronger in 2025. This disparity should be made clear to the Scottish public, which could put pressure on the Scottish Government to explain how it plans to keep up with the rest of the UK.
“Scotland’s steady GDP growth points to an upward trajectory and a cautiously optimistic economic outlook. But the bigger picture is still unfolding – major fiscal announcements on the horizon, including the Scottish Government’s Medium Term Financial Strategy, its Fiscal Sustainability Delivery Plan, and the UK Spending Review, could still alter the outlook significantly, meaning it’s currently a case of ‘watch this space.’”