SNP Reach Agreement With Scottish Liberal Democrats and Scottish Green Party to support the 2025-26 Budget

29th January 2025

Agreements have been reached separately with the Scottish Liberal Democrats and Scottish Green Party to support the 2025-26 Budget.

Finance Secretary Shona Robison has announced she will table amendments to the 2025-26 Budget Bill to allocate £16.7 million funding.

• Bolster drug and alcohol services, including £1 million for specialist support for babies born addicted to drugs
• Begin a £2 bus fare cap pilot in one regional transport area
• Further strengthen support for hospices from £4 million to £5 million
• Increase Nature Restoration by £3 million to its highest ever level
• Invest in targeted support for the College sector and protect Corseford College
• Extend free school meal eligibility in S1-S3 in eight local authority areas for pupils in receipt of Scottish Child Payment
• Offer flexibility for Orkney Island Council in terms of capital and resource funding

Ms Robison said, "We are determined to deliver on the issues that matter most to the people of Scotland - and that is why this Budget invests in public services and in eradicating child poverty, acts in the face of the climate emergency, and supports jobs.

"The First Minister was clear that we would bring forward a budget by Scotland for Scotland, and the negotiations we have taken forward have been in that spirit. These additional initiatives demonstrate the value of a progressive approach and dialogue.

"During every stage of this process the Liberal Democrats and the Greens have engaged in our discussions in a positive and constructive manner.

"Through seeking compromise I believe we are delivering a budget that will strengthen services and support our communities. With the agreements with these two parties now in place this will secure a majority in parliament in support of the Budget Bill."

Previously the CBI said
"The income tax divergence between Scotland and the rest of the UK remains a significant disadvantage for local firms and their ability to compete for highly skilled staff. While firms will be relieved to see commitments to no additional bandings, the reality is that the policy remains a handbrake on growth and comes against a background of escalating costs for employers.

"On business rates, firms will be left reflecting on a mixed bag. The decision not to introduce a new surtax for certain large retailers and the announcement of reliefs for properties in the hospitality sector is a welcome move. However, the failure to mirror reliefs available to retail and leisure businesses based in England, as well as the decision not to freeze the intermediate and higher property rates, will make life tougher for those firms being buffeted by a perfect storm of tough trading conditions and mounting costs.

The Institute for Fiscal Studies - 4 December 2024
David Phillips, an Associate Director and head of devolved and local government finance at the IFS, said:

"The Scottish Government has trumpeted a Budget providing record levels of funding for the NHS and councils, universal winter payments for pensioners, and starting the process of ending the two-child cap in universal credit in Scotland. And comparing the amount the Scottish Government plans to spend on public services in 2025-26 with the plans for this year set out in its Autumn Budget Revision suggests a significant increase of 5.3% in cash terms, or 2.9% after accounting for inflation.

However, this excludes £1.3 billion of funding that Budget documentation implies that the Scottish Government still has to allocate to services this year. Accounting for this would leave day-to-day spending on public services next year essentially flat in real terms between this year and next, falling by 0.3%. Depending on how this is allocated across services, the increases next year for Health and Local Government highlighted by Finance Secretary Shona Robison may end up being rather smaller, and other portfolios may find themselves joining Rural Affairs in seeing cuts to day-to-day spending.

The £1.3 billion still to allocate is less than the additional funding that has become available over the last 2 months. This means, despite previously suggesting it had already accounted for the top-up to its funding announced in the UK Budget in its financial planning for the current financial year, the Scottish Government is, in effect, planning to carry forward £400 million for use in future years. If it can, it would be wise to carry forward more than this, to improve the tight future funding situation.

A reduction in drawdowns of income from offshore windfarm licenses this year has helped fund the deployment of £326 million for capital investment next year. Together with a substantial boost in capital funding from the UK government, Scottish Government investment is now set to increase by almost 12% in real terms next year. However, capital funding is set to fall by close to 5% in real terms in 2026-27 and remain at these lower levels for the following 3 years. More likely - as in the rest of the UK -, next year will see an underspend on capital budgets in Scotland, allowing some top-up to investment spending in subsequent years

Overall, the tax policy changes announced today raise a modest £54 million for public spending in Scotland next year. Much more important for the budgetary situation, though, was a significant downgrade in the forecast net income tax position this year and over the next few years. Whereas last December the Scottish Fiscal Commission's forecasts implied Scotland's income tax revenues would exceed the corresponding block grant by over £1.7 billion in 2025-26, its new forecasts imply net revenues of just £0.8 billion - a £0.9 billion reduction equivalent to around 2% of the Scottish Government's day-to-day spending. A similar downgrade in the forecast net position this year of £0.7 billion from £1.4 billion to £0.7 billion, if borne out, will mean the Scottish Government has to start repaying the difference to the UK government in 2027-28, squeezing budgets in the latter half of this decade.

More generally the more challenging longer-term funding outlook would mean that finding money for the Scottish Government's pledge to remove the two-child limit in universal credit at an annual cost of around £200 - £300 million would likely require cuts to some other areas of spending or tax rises.

In this context, while the Scottish Government’s new Tax Strategy sets out clear plans for income tax rates and thresholds for the remainder of the parliament, which provide clear guidance to taxpayers, it would severely limit its options if it needed to raise additional revenue. Beyond that, the Tax Strategy is full of good intentions to engage with others to improve tax policy and delivery, but little by way of concrete proposals or sense of what destination the Scottish Government is aiming for."

On the Scottish Government’s spending decisions:
The Scottish Government has yet to allocate all the funding it plans to use this year to different service budgets. Bearing this in mind, day-to-day spending on Health and Social Care is set to increase by 3.4% in real terms next year compared to the latest available budget for this year, while spending by the Finance and Local Government portfolio is set to increase by 2.6% in real terms. Day-to-day spending by the Constitution, External Affairs and Culture portfolio is set to increase by 9.2% in real terms to fund a pledge to increase spending on culture by £34 million. In contrast, day-to-day spending by the Rural Affairs, Land Reform and Islands portfolio is set to fall by 3.1% in real terms.
The true year-on-year increases would be much smaller if all the funding not yet allocated this year is ultimately spent in this year. For example, if half of it (£670 million) was used to top-up the Health and Social Care budget further this year, rather than increasing by 3.4% in real terms it would stay roughly flat between this year and next (falling by 0.1%).
As we highlighted in our pre-Budget report, it might be wise for the Scottish Government to bank some of the unallocated funding for future years instead, to help address the difficult medium-term funding outlook. This could help mitigate trade-offs faced next year, given the much slower increases in total day-to-day funding available after this year.
Capital investment is set to grow by around 12% in real terms next year, driven by a combination of higher UK government funding, the use of Scotwind proceeds and an increase in the amount of borrowing in line with inflation. However, spending is then planned to fall by close to 5% in real terms in 2026-27 and remain at that lower level over the following 3 years. Perhaps more likely this will be smoothed out with some of next year’s capital budget being pushed into later years.
On the Scottish Government’s social security policy:
Winter fuel payments of £100 per pensioner household for those who will no longer receive the more generous means-tested (£200 or £300) payment were confirmed from winter 2025-26. These will cost £67 million next year, rising to £78 million in 2029-30.
The Scottish Government has announced it aims to ‘effectively scrap’ the two-child limit that caps the main per-child elements of universal credit at the level a family can receive if they have two children, from 2026-27 onwards. This would cost around £250 million per year.
On Scottish tax policy and strategy:
The Scottish Government will increase the starter and basic rate income tax thresholds by 3.5% at a cost of £24 million, with a commitment to continue uprating these by at least inflation for the rest of the Parliament; but will freeze the higher, advanced and top rate thresholds, raising an estimated £71 million next year. The freeze in the latter thresholds has been confirmed for 2026-27 too, with the revenues increasing to £223 million in that year.
The Tax Strategy also sets out an intention not to increase the rates of income tax or to introduce any new bands. The latter is particular is very welcome, since Scotland has too many income tax bands already.
The additional dwelling supplement in land and building transactions tax, which is charged on the purchase of properties by landlords and second home owners, will be increased from 6% to 8%. This makes arguably Scotland’s most damaging tax even worse.
The Tax Strategy provides little sense of direction on tax policy beyond income tax. On council tax and business rates, for example, there is merely an intention to continue dialogue and engagement. It does not inspire confidence that much-needed reform will actually happen. There is welcome recognition of the value of more systematic evaluation of the effects of tax policy, and plans to improve the administration of the tax system and taxpayers’ understanding of it. It remains to be seen what will be achieved in practice.

For more specific areas from IFS go to https://ifs.org.uk/collections/scottish-budget-2025-26

For many details of what is in the 25/26 budget go to
https://spice-spotlight.scot/2024/12/04/scottish-budget-2025-26-initial-reaction/