Scottish Fiscal Commission Points To Problems With The Scottish Budget

10th December 2024

The Scottish budget depends upon funding from the UK Government and revenue from taxes raised by the Scottish Government.

Following the UK Autumn Budget the Scottish Government has seen a significant increase in UK Government funding.

The Block Grant for capital spending now grows by 10.1 per cent between 2024‑25 and 2025‑26, whereas previously it was expected to fall.

The Block Grant for day-to-day spending has increased by £1.4 billion in 2024‑25 as a result of the UK Budget and there is a further increase of £1.5 billion in 2025-26.

The Scottish Fiscal Commission originally forecast income tax would contribute £1.412billion to this year's Scottish Budget in December 2023. However, they have revised this figure down to £711m - a £701m reduction.

This is due to Scottish income tax revenues being forecast to grow at a lower rate compared to the rest of the UK, according to the Scottish Fiscal Commission.

But the working of the fiscal framework means that the overall changes in the Scottish Budget are more modest.

The Scottish Fiscal Commission has increased its forecasts of tax revenues, in part because of higher than expected inflation and in part because of policy changes by the Scottish Government. However, the income tax net position for 2025-26 used to set the Scottish Budget has reduced the funding by £575 million between 2024-25 and 2025-26. This is because the OBR's forecasts for income tax revenues in the UK, based on the latest outturn data for 2022-23 and their updated economy forecasts, have improved by more than the Commission's forecasts for Scotland.

Combining the increase in block grant funding and the worsening net tax position produces only a modest increase in total funding available in next year's Scottish Budget. It is against this background that some of the policy choices made by the Government in managing the budget remain difficult.

Social security spending takes up a growing share of the budget with spending in 2025-26 forecast to be £1,334 million higher than the corresponding funding provided by the UK Government. After accounting for social security commitments, day‑to‑day spending on other areas is falling in real terms by 0.3 per cent between 2024-25 and 2025-26. This reflects the Scottish Government’s priorities to support those on low incomes and pensioners, and tackle child poverty but does mean that spending in other areas is constrained.

In addition, the Scottish Government has announced its intention to explore ways of mitigating the two-child limit in the UK‑wide Universal Credit from 2026-27. This could increase social security spending by around £150 million in 2026-27 rising to over £200 million in 2029-30 and would further increase the share of day to day spending allocated to social security. As this policy was communicated to the Commission late in the Budget process its cost has not been included in their social security forecasts or spending analysis.

The Scottish Government will receive some compensation from the UK Government for the changes to employer National Insurance Contributions in respect of public sector employees. But the larger share of spending on public sector wages in Scotland means the full cost of employer NIC rises is unlikely to be covered, which will increase the pressure from staff costs within individual portfolios. The Scottish Government needs to be prepared to manage the risks its paybill is higher than budgeted for.

The Commission’s Chair, Professor Graeme Roy, said

The Scottish Government has benefited from significant extra funding from Rachel Reeves’ Autumn Budget. However, the consequences of much stronger income tax revenues elsewhere in the UK affecting the net tax position, combined with ongoing pressures from a rising pay bill and increased commitments on social security, continue to act as a binding constraint on the Scottish Government’s broader spending decisions.

There is a significant increase in capital spending in 2025-26 allowing the Scottish Government to restart paused capital projects and make some new commitments. But day-to-day spending remains constrained with much of the Government’s extra headroom for this year and next taken up by existing commitments and new measures that lock in longer-term fiscal costs."