The UK Budget Has Improved The Scottish Funding Outlook, But Tough Choices Loom Down The Line

27th November 2024

The Institute for Fiscal Studies has published a comprehensive look at funding of the Scottish Government in advance of the Scottish budget on 4 December 2024. A Lengthy article and here are some snippets - link to the full article at the bottom of this page.

In her first UK Budget, on 30 October, the Chancellor Rachel Reeves significantly topped up spending plans for both day-to-day (resource) spending and capital investment, in the current financial year (2024-25) as well as in future years.

Combined with in-year increases previously announced by the Scottish Finance Minister Shona Robison, funded in part by underspends last year, this has transformed the financial picture this year for the Scottish Government.

However, Ms Reeves pencilled in much smaller year-on-year increases in funding in future years which, if stuck to, would likely mean much trickier trade-offs for the Scottish Government - potentially as soon as next year.

The funding position for 2024-25 has been transformed
In December 2023, when the Scottish Budget for 2024-25 was set, total resource funding in 2024-25 was expected to be £47.6 billion. Of this, £6.3 billion was expected to be spent on social security and £265 million used on debt service, leaving £41.1 billion available for public service spending.

Since the Scottish Budget was set, the funding available to the Scottish Government for this year has increased.

Changes in funding up to the Autumn Budget Revision (ABR), published on 2 October (before the UK Government's Autumn Budget) increased the amount available for day-to-day (resource) spending on public services by £1.2 billion. As we will discuss below, this was used to help address pay and other pressures facing the Scottish Government.

Some of the increase in funding was due to changes in UK government funding. At the UK Spring Budget in March 2024, additional spending on some devolved areas (predominantly health and local government) generated Barnett consequentials for day-to-day spending of £293 million. At Main Estimates in July 2024, an additional £437 million of resource Barnett consequentials were allocated. This additional funding largely represented the higher assessed costs of unfunded public sector pensions.1 These costs will also need to be met by public sector employers in Scotland, so this funding does not increase the real spending power of the Scottish Government.

The new UK government's July 2024 decision to restrict winter fuel payment to only pension credit recipients from this winter led to a reduction in funding for the Scottish Government of around £140 million. The Scottish Government has said it will replicate this policy, meaning that the amount of funding available for public service spending will ultimately be little changed. However, if it wanted to, the Scottish Government could choose to defer the reduction in funding (given the UK government's policy decision was made after the 2024-25 Scottish Budget was finalised), which would allow it to spend that money elsewhere in the short term, but it would need to be paid back later on. We understand a final decision on this has yet to be made, but the funding figures published at the ABR assume the funding adjustment will be applied in-year rather than deferred. Forecasts for other social security block grant adjustments (BGAs) and spending, and tax BGAs and revenues, were not updated at the ABR.

Scottish Government decisions also increased the funding available for day-to-day spending this year. These decisions included: an increase in planned drawdown of ScotWind - one-off income from leasing the Scottish seabed for windfarms - from £200 million to £424 million; the planned drawdown of £162 million in reserves, following underspends in 2023–24; and the cancellation of a planned £89 million transfer from its resource to capital budget.

Figure 1 summarises these changes, with the resulting amount of funding available for public services in 2024–25 increased to around £42.3 billion by the time of the ABR.

These figures are of course illustrative, but they show that the Scottish Government looks set to continue to face tough trade-offs in future years. Carrying forward funding would ease trade-offs between services next year. But such funding can only be used once: it will only help the budgetary pressures facing the Scottish Government in later years if it is successfully utilised to help boost productivity, address the drivers of service demand, or boost economic performance and hence tax revenue. Even if successful, such efforts may take several years to bear fruit, meaning without further top-ups to UK spending plans and/or increases in Scottish taxes, some services will likely face cuts in future years.

What can the Scottish Government do?
In this context, the Scottish Government should plan realistically – recent years have seen something of a habit of over-promising and then delaying or scaling back some initiatives in order to free up funding for pay and NHS pressures. Plans for next year will be set in the upcoming Scottish Budget, and plans for later years should be set in a Spending Review in the summer, aligned with the time frames set out in the UK-wide Spending Review planned for late spring. It may be tempting to use these to offer some pre-Scottish election ‘goodies', but the difficult medium-term funding outlook means continuing with them post-election could mean higher taxes or cuts elsewhere.

If it feels able to, it may be wise for the Scottish Government to ‘bank' some of the increase in funding this year (by drawing down less from reserves and ScotWind proceeds, for example), to invest in skills, technology and other ways to boost public sector productivity or more generally to grow the economy. And on the capital side of its budget, it could use its borrowing and reserves powers to smooth out the profile of capital spending over the next few years – money will likely be better spent with a bit more time to plan.

The Scottish Government should also evaluate key policies that increasingly differentiate it from the rest of the UK – including its higher public sector pay and income tax policies and wider tax strategy. Alongside the new decisions announced by the Scottish Government in its Budget, these are issues we will return to in our main post-Budget report.

Read the full IFS article HERE

Comment
The past few years have seen a squeeze on Council budgets and the outlook for 25/26 is not great and this article does not give any confidence for improvement. Most Scottish councils are already predicting deficits that will mean some hard decisions for spending going forward. Cuts are inevitable unless more income can be raised from more places such as the Tourist Tax and parking charges etc.