10th May 2026
The next Scottish government is likely to face some of the toughest financial decisions since devolution. Economists, the Fraser of Allander Institute, the Institute for Fiscal Studies and the Scottish Fiscal Commission have all warned that Scotland is heading towards a funding gap approaching £5 billion by the end of the parliamentary term unless spending is cut, taxes rise, or economic growth improves sharply.
The problem is being driven by several pressures all happening at once:
rising NHS and social care costs due to an ageing population
rapidly increasing welfare spending
public sector pay settlements running above inflation assumptions
weak economic growth and tax revenues
higher borrowing and debt servicing costs
limited capital funding for infrastructure
reliance on temporary funding sources that are disappearing
The Scottish Government itself has already admitted that the fiscal environment is becoming “increasingly challenging” and that “choices and trade-offs” will be unavoidable.
Because Holyrood must legally balance its budget each year, the government in Edinburgh will probably be forced into a mixture of spending restraint, workforce reductions, delayed projects and selective tax increases.
One of the biggest areas likely to face pressure is the public sector workforce. Ministers have already accepted plans for workforce reductions of around 0.5% per year over five years — equivalent to roughly 12,000 jobs.
That does not necessarily mean mass compulsory redundancies, but it could involve:
recruitment freezes
early retirement schemes
not replacing retiring staff
merging public bodies
reducing management layers
more digital services replacing staff roles
Local government may be hit especially hard. Councils already face growing costs for social care, special education, homelessness and energy while many have little remaining financial flexibility. Analysts increasingly expect councils to see tighter settlements in real terms. That could mean:
fewer library and leisure services
cuts to road maintenance
reduced bin collections
delayed school repairs
reductions in culture and community spending
further council tax rises
Capital spending is another likely casualty. Economists warn the infrastructure budget is becoming extremely tight.
That could mean delays or scaling back of:
new road projects
rail improvements
ferry replacement programmes
affordable housing schemes
hospital upgrades
school construction
green energy infrastructure support
Large long-term infrastructure ambitions may increasingly depend on private finance or borrowing models, despite concerns over cost.
Health spending will probably continue to rise because politically it is very difficult to cut the NHS. However, if health consumes more of the budget, other departments may effectively face austerity. Economists describe this as “crowding out” other spending areas.
Education could therefore face significant restraint despite political promises. Universities and colleges may see tighter grants, while councils could face pressure to reduce teaching support staff and defer school maintenance.
Welfare spending is becoming one of the biggest long-term pressures. Scotland’s devolved benefits system is expanding rapidly, particularly disability-related payments. If UK welfare reforms reduce Treasury funding linked to those benefits, Holyrood may face difficult decisions over whether to top up payments itself or reduce other services.
Tax rises are also possible, although politically sensitive. Scotland already has higher income tax rates for many earners than England, which economists warn may begin discouraging higher earners and businesses. Still, the government may have little choice but to consider:
freezing tax thresholds further
raising higher-rate income tax
increasing council tax powers
reducing business rate reliefs
introducing new wealth or property taxes
increasing charges for public services
However, economists warn taxation alone cannot close a £5 billion gap without harming growth.
Business groups are increasingly warning that Scotland risks entering a cycle where higher taxes and weaker growth reduce investment and productivity. That would make balancing future budgets even harder.
Some manifesto promises made during the election campaign may therefore never happen or may be heavily watered down. Analysts have criticised almost all parties for avoiding the scale of the financial challenge during the campaign.
The likely reality is that the next Scottish government will have to quietly abandon some commitments while introducing what are effectively “stealth austerity” measures — budgets rising slightly in cash terms but falling after inflation.
In practice, Scotland may move into a period where governments try to protect the NHS and welfare spending while most other departments experience years of extremely limited growth or real-terms cuts. That would resemble a softer version of the austerity era seen after 2010, but combined with higher taxes and much greater demographic pressure.
The biggest political challenge for the new government may therefore be explaining to voters that Scotland can no longer continue expanding services faster than the economy and tax base can support.