3rd June 2026
The Institute for Fiscal Studies (IFS) has delivered a stark warning to Scotland's newly elected government: the easy choices have largely run out. The next few years will force ministers to confront a difficult reality of either raising taxes, cutting spending, or abandoning some of the promises made during the Holyrood election campaign.
At the heart of the IFS analysis is a simple but uncomfortable fact. While Scottish Government spending on public services grew relatively strongly between 2019 and 2025, future growth is expected to slow dramatically. Real-terms funding growth is forecast to average just 0.6% a year over the next three years, with an actual reduction in day-to-day spending projected for 2027-28. That would make the first full budget of the new parliamentary term one of the most challenging in recent Scottish history.
The problem is compounded by the pressures facing the NHS. Pay awards for healthcare staff, rising demand from an ageing population and continuing pressures on hospitals mean that health spending is likely to consume an ever-larger share of the Scottish budget. The IFS argues that much of the limited additional funding available will need to be directed towards health services simply to maintain current levels of performance.
That creates a squeeze elsewhere. Existing spending plans already imply real-terms reductions across a range of government portfolios, including local government, education, justice and rural affairs. The Scottish Government hopes that productivity improvements, workforce reductions and cuts in administrative costs will soften the blow. However, the IFS questions whether those savings can realistically be achieved at the scale required. Public sector employment has continued to grow and progress towards the planned efficiencies remains unclear.
The warning becomes even more serious when economic uncertainty is taken into account. The IFS notes that current forecasts assume Scottish earnings growth will outperform the rest of the UK, thereby generating stronger tax revenues. If that does not happen, Scotland could face a funding shortfall running into hundreds of millions of pounds. Higher inflation following recent global tensions would add further strain. In such circumstances, spending cuts outside health could become significantly deeper than currently planned.
Against this backdrop, ministers must decide which manifesto commitments they are genuinely prepared to prioritise. The SNP estimated that its election pledges would eventually cost around £1.4 billion annually. While some smaller proposals, such as school initiatives, expanded free school meals or targeted health programmes, may be affordable, larger ambitions present a tougher challenge.
The most expensive commitment is the proposed expansion of subsidised childcare. The IFS estimates the policy could cost around £540 million a year once fully implemented. While that figure is not enormous in the context of Scotland's overall budget, finding the money would require difficult trade-offs. Ministers would need to slow increases in health spending, impose deeper cuts elsewhere, raise devolved taxes, or scale back the childcare plans themselves.
One area where the IFS sees an opportunity is council tax reform. Scotland's council tax system remains based on property valuations that are more than three decades old. The think tank argues that revaluation and reform could make the system fairer and more rational. With several parties expressing support for change, this could become one of the major fiscal reforms of the new parliamentary term.
For Scottish voters, the most important message from the report is that politics cannot indefinitely escape economic reality. Election campaigns are often filled with promises of better services, new entitlements and ambitious programmes. The IFS is effectively asking whether Holyrood is prepared to have a more honest conversation about how those ambitions will be funded.
The challenge facing John Swinney's government is therefore not simply administrative; it is political. Every budget decision from now on will involve choices between competing priorities. Protect the NHS, and other services may face cuts. Expand childcare, and taxes may need to rise. Refuse both spending cuts and tax increases, and manifesto promises may have to be shelved.
The fiscal reckoning described by the IFS is not some distant threat. It is already approaching. The question is whether Scotland's politicians are prepared to tell voters the truth about the difficult choices that lie ahead.
Read the full Institute for Fiscal Studies report HERE
Further Reading
Fraser of Allender
Weekly update fiscal holes bond markets and child poverty analysis