21st December 2025
Due to the UK Government delaying the budget so much this year it has pushed the Scottish budget setting process into January and consequently Scottish councils will also have much later dates probably February or March to set their own budgets.
The Scottish Government's budget is shaped by a mix of UK government funding (the block grant) and tax revenues raised in Scotland (mainly income tax, some property taxes, and other devolved levers).
The size of the Scottish Budget is therefore partly dependent on UK fiscal decisions and economic forecasts, as well as the performance of devolved taxes — which can be volatile and difficult to predict.
Independent analysts (such as the Institute for Fiscal Studies) have noted that while Scotland received additional funding via the UK Budget that improved the immediate fiscal outlook, overall budget growth remains modest once inflation and cost pressures are taken into account. Real-terms growth for day-to-day spending has been limited, and new commitments like social security support absorb a large share of available funds.
Institute for Fiscal Studies
Moreover, forecasts from the Scottish Government's own fiscal strategy show that borrowing will be used at capacity in coming years to help balance investment and spending plans, but available borrowing powers are constrained and temporary. Reserves like the Scotland Reserve have funds available for this year, but are expected to be drawn down and not maintained as long-term cushions.
Central Government Spending Pressures
A. Public Services and Cost Inflation
The Scottish Government's budget must cover key services such as health, education, justice and social security — all of which are facing significant cost pressures. These include:
Inflationary cost increases, especially in energy, wages and supplies.
Public sector pay settlements that absorb funded increases.
Demographic pressures, notably in health and social care with an ageing population description.
These pressures mean that even where funding increases are provided, much of that extra money goes simply to keep up with existing commitments rather than to expand services.
Institute for Fiscal Studies
Local Government - The Most Acute Pressures
Local councils — responsible for many front-line services including schools, social care, housing, roads and waste — are experiencing severe and growing financial strain:
A. Budget Gaps and Demand Pressures
An assessment by the Accounts Commission (the public finance watchdog for local government) has highlighted that councils face multi-hundred-million-pound budget shortfalls, with estimates of a £647m gap in 2025/26 and projections that this could grow to nearly £1bn over two years.
This shortfall arises even though councils received over £15bn from the Scottish Government in 2025-26 — with the additional cash only partly keeping pace with increasing costs, including wage bills, higher employer National Insurance contributions and service demand — particularly for social care.
Audit Scotland
B. Unsustainable Short-Term Measures
Councils have used various short-term responses — including reserves, one-off savings, service cuts, higher charges, and council tax increases — to balance budgets. But watchdogs warn these are not sustainable as a long-term solution. Continual reliance on reserves depletes future buffers, while ongoing savings and cuts erode service quality.
Audit Scotland
C. Calls for Fairer Funding
COSLA (the Convention of Scottish Local Authorities) has publicly urged a significant increase in revenue funding for councils in the upcoming Scottish Budget — suggesting figures in the billions for essential services and capital investment — and greater flexibility and long-term certainty in how funds are allocated.
COSLA
The Political and Public Debate
Economic and budget outcomes are inherently political. In recent budgets, the Government has negotiated support from other parties in the Scottish Parliament to pass spending plans — a sign of the compromise required when margins are tight.
The Guardian
Debate has also surrounded how tax policy choices, welfare spending and strategic priorities (e.g., affordable housing) are balanced against fiscal realities. The initial reactions to the previous budget showed that political agreement is often hard-won and reflects competing pressures on limited funds.
Public expectations for better services often clash with the harsh reality of constrained budgets. And councils, as the closest level of government to citizens, are where many of the visible consequences of these pressures — closures of services, higher local charges or cuts — are most acutely felt.
Looking Ahead: January 2026 and Beyond
As the Scottish Budget for 2026 is prepared:
White hot pressures on council funding are likely to dominate concerns, as local authorities warn that without a much larger settlement, essential services will face cuts or higher costs for local taxpayers.
Continued tight fiscal headroom means the Scottish Government must weigh priorities carefully: balancing national services, local government needs, and broader policy commitments like social care reform or climate action.
Borrowing powers and reserves can provide temporary support, but are no substitute for structurally sustainable revenue funding if long-term pressures persist.
In short, while the next budget will set spending priorities for the year ahead, many of the underlying strains — particularly on councils — are structural and require strategic, multi-year solutions, not merely annual adjustments.
The Scottish finances heading into the January Budget reflect a broader challenge seen across public finances in advanced economies: tight revenue growth, rising demand for services, and limited fiscal tools to bridge the gap. For local councils in particular, the next fiscal year looks set to be one where difficult decisions on services, savings and funding arrangements rather than easy fixes become unavoidable.