The Institute for Fiscal Studies Looks Over the Scottish Budget

14th January 2026

The Institute for Fiscal Studies (IFS) welcomes some of the headline measures in Scotland's 2026‑27 pre‑election budget such as support for families with children, business rates relief, and above‑inflation increases in some income tax thresholds. But warns that the broader fiscal picture remains weak and, in many areas, less favourable than the government's own rhetoric suggests.

Tax Policy: Small Giveaways and a Larger Hidden Tax Rise

The Scottish Government rightly highlights increases to the basic and intermediate income tax thresholds, which are being uprated by more than inflation; this will reduce tax bills for many lower‑income taxpayers.

However — and critically — higher‑rate income tax thresholds are frozen not just next year but until 2029. This freeze is a de facto tax rise because wage growth will gradually push more taxpayers into higher brackets over time.

Freezing thresholds is similar to UK government policy, but because Scottish rates were already higher than in the rest of the UK, this means middle‑ and higher‑income Scots will pay substantially more tax over time than their counterparts elsewhere. The IFS estimates someone on ~£50,000 could pay ~£1,480 more by 2028‑29 than under the rest‑of‑UK system, and someone on ~£125,000 could pay ~£5,200 more.

Two new council tax bands for very expensive properties will be introduced by 2028, but the IFS says this is a partial fix to an outdated tax system, and may reduce momentum for a full revaluation of all council tax bands — a reform many analysts see as overdue.

Spending Plans: Tight Budgets and Shifting Priorities

The IFS describes the spending side of the Budget as a "game of two halves": modest overall increases combined with cuts in real terms for many services once inflation is accounted for.

Day‑to‑day public service spending only rises 0.6 % above inflation in 2026‑27, and by an average of *0.2 % over the following two years — a very tight settlement for many areas.

Health and social care spending is only marginally higher next year (+0.7 % real terms), which the IFS says is likely insufficient to maintain current service levels, let alone improve them.

From 2027‑28 onwards, the government plans larger health increases (averaging ~2.4 % per year), but these come at the cost of cuts in almost all other portfolios — such as local government and education, which shrink in real terms. Local government, for example, is set for a 2.1 % real‑terms reduction on average between 2026‑27 and 2028‑29, before council tax increases would be needed just to hold services steady.

Wider Concerns and Transparency Issues

The IFS highlights two broader concerns:

1. Fiscal constraints and forecasting risk
Scotland's Budget depends heavily on UK government funding decisions and tax revenue forecasts that could prove optimistic — particularly the assumption that earnings (which drive Scottish tax receipts) will grow faster than elsewhere in the UK. If that doesn’t materialise, the Scottish Government may face pressure to cut spending further or raise taxes.

2. Lack of clarity and transparency
The Budget document’s presentation obscures the true scale of changes to public spending — for example by comparing next year’s figures to earlier published plans rather than the most recent outturn data — making it harder for analysts and the public to judge the real implications. The IFS calls this approach not good enough, especially in an election year.

Key Takeaways

Modest tax cuts for lower earners are offset by much larger tax increases via frozen thresholds that will raise revenues from wealthier taxpayers over time.

Overall day‑to‑day public spending rises only marginally above inflation, meaning many services may face budget squeezes or need extra top‑ups during the year.

Health gets relatively more, other services face cuts, especially local government.

The Budget’s presentation makes it harder for voters and analysts to see the real changes in spending and taxation.

Read the full report HERE