8th June 2026
For many people rumours of a one percent reduction in capital funding across all government departments by the UK government to help increase funding for defence spending may seem a long way away but it might impact on the proposed new Thurso School Complex.
It potentially could impact as it might ripple across many projects adding delays and time constraints and therefor push up prices. But there are several stages before it would affect projects such as the proposed new school campus in Thurso.
The reports you may have heard on tv and radio today relate to plans being discussed ahead of the UK Spending Review. They suggest that the UK Government may ask departments to reduce capital spending by around 1% to help fund increased defence spending. At the moment, these are proposals rather than final allocations.
How this could affect Scotland
Scotland receives much of its capital funding through the Barnett Formula. If the UK Government cuts capital budgets in departments where spending is devolved (such as education, transport or local government), the Scottish Government would normally receive a smaller capital block grant.
However, it is not always a simple 1% cut because:
Defence spending is largely reserved to Westminster, so increases there do not automatically increase Scotland's budget.
The Scottish Government can choose where to make any reductions within its own capital programme.
Ministers in Edinburgh may decide to protect some projects while delaying others.
What about Highland Council?
This is where it becomes more relevant to capital spending in Highland.
The proposed Thurso school complex depends on several things:
whether the Scottish Government maintains capital funding for local authorities;
whether the project receives Scottish Government support;
Highland Council's own borrowing capacity and capital programme;
the priority the council gives the project compared with other schools and infrastructure.
If the Scottish Government's capital budget becomes tighter, councils across Scotland may be asked to delay or phase projects rather than cancel them outright.
The timing is important
The project is currently starting a six-week consultation.
That actually works in its favour in one respect:
Consultation does not commit the council to immediate construction.
Once the consultation finishes, the council will review responses and then decide whether to proceed.
If capital funding becomes more difficult over the summer, councils often re-examine the timing of large projects before contracts are signed.
So the project could still proceed, but perhaps later than originally planned if funding pressures increase.
Is there already pressure on Scotland's capital budget?
Yes. Even before these latest reports, Scotland's capital budget was under strain.
The Fraser of Allander Institute said earlier this year that the Scottish Government's original capital plans exceeded the funding available by about £1 billion, meaning difficult choices over infrastructure projects were already expected.
Similarly, the Institute for Fiscal Studies has warned that after an initial rise, Scotland faces several years of tight capital spending, requiring projects to be prioritised carefully.
Specifically for the Thurso school
The consultation itself is not at risk.
The project would not automatically be cancelled.
The biggest risk would be a delay if Scottish Government capital funding becomes tighter or Highland Council has to reprioritise its investment programme.
Large school projects usually rank highly because they replace ageing buildings and address health, safety and educational needs. Councils are generally reluctant to abandon them once they have reached the consultation and planning stage unless funding becomes exceptionally constrained.
The good news
The proposed £100 million Thurso Community Point of Delivery (PoD) is not simply another school project. It is one of the flagship schemes in Highland Council's long-term £2.1 billion Highland Investment Plan (HIP).
The project aims to replace the ageing Thurso High School and create a modern campus bringing together:
secondary education
primary education
early years provision
enhanced Additional Support Needs facilities
community services
improved sports facilities
links with the local UHI campus
Because it is such a strategic project, it is likely to receive much greater protection than smaller capital schemes.
What the Council has just decided
Just a few days ago, Highland Council's Education Committee agreed to move forward to the formal statutory consultation.
The consultation will run for at least six weeks and, importantly, no final decision will be taken until 2027, after the consultation responses and advice from Education Scotland have been considered.
So there is still a long decision-making process ahead.
However, there is one issue that caught my attention
While reading the council papers, I found repeated references to the need to keep the Highland Investment Plan within affordable borrowing limits.
The Council states that the programme has to remain:
affordable
prudent
sustainable
and that it must continue to review costs because construction inflation and other pressures have added £15–20 million of additional costs across the programme.
That tells me the Council is already being cautious before any possible UK Government spending reductions.
How would a UK capital spending cut affect Thurso?
This is where it becomes more nuanced.
There are three separate sources of money involved.
1. Highland Council borrowing
Much of the Highland Investment Plan is funded by Council borrowing and by the ring-fenced 2% Council Tax increase.
That money is largely under Highland Council's own control.
2. Scottish Government funding
Some education projects also depend on Scottish Government capital support.
If the Scottish Government receives less capital funding because Westminster reduces departmental capital budgets, that could make it harder for Edinburgh to support local authority projects.
3. Other partners
The Council is also looking at contributions from public sector partners and other funding opportunities where appropriate.
Does this mean the Thurso project is in danger?
At the moment, I do not think cancellation is the most likely outcome.
The more likely possibilities would be:
construction starting a year later;
the project being built in phases;
some community facilities being delayed until later;
adjustments to the final design to reduce costs.
Large replacement schools usually remain high priorities because older buildings become increasingly expensive to maintain.
One encouraging point
The Council has already committed around £100 million to Thurso within its Highland Investment Plan and has spent many months carrying out engagement with the community before reaching the formal consultation stage.
That represents a significant investment of time and planning. Projects that reach this stage are generally more resilient than ideas that exist only on paper.
Biggest concern
Watching one thing over the next month, it would not actually be Westminster.
It would be the Scottish Government's Budget, because that is where any reduction in Scotland's capital funding will become clear. After that, Highland Council will know how much flexibility it has within its own capital programme.
The Chances On Way or another - you can make your own guess.
Around a 70–80% chance that the Thurso campus eventually goes ahead.
Around a 40–50% chance that the timetable slips by a year or more because of funding pressures.
Less than a 20% chance that the project is abandoned altogether, unless there is a much larger deterioration in public finances than is currently expected.
Those are assessments based on the current evidence rather than official forecasts but it is anyone's guess at the moment.
The Highland Council appears to view the Thurso project as more than a school replacement. It is intended as a catalyst for the regeneration of the town and the wider Caithness area, linking education, community services and economic development. That strategic importance makes it one of the stronger candidates to survive if public capital spending becomes tighter.
Another Overhanging Budget Problem
In its Medium-Term Financial Strategy (MTFS), the Scottish Government projected that there would be a gap between its planned spending and the funding it expects to receive. That gap grows over the forecast period to almost £5 billion by 2029–30 unless spending is reduced, taxes are increased, or other savings are found.
Who has referred to the £5 billion gap?
Several respected organisations have discussed and analysed this figure:
1. Scottish Government
The Government itself described a growing fiscal gap in its Medium-Term Financial Strategy.
It is important to understand that this is not an actual deficit, because the Scottish Government is legally required to balance its budget each year. Rather, it is a forecast funding gap between current spending ambitions and expected future income.
2. Audit Scotland
Audit Scotland endorsed the seriousness of the challenge, stating:
"A forecast gap of nearly £5 billion remains between what ministers want to spend on public services and the funding available to them."
It warned ministers that they need much more detailed plans to close that gap.
3. Scottish Parliament Information Centre
SPICe produced an analysis explaining that the Scottish Government's own projections show the gap rising to nearly £5 billion by 2029–30, and that this will require either:
lower spending,
higher devolved taxes,
or a combination of both.
4. Fraser of Allander Institute
The Fraser of Allander Institute has repeatedly warned that the Government has been relying on one-off funding sources to balance its books. It estimates an underlying budget shortfall of around £500–650 million in the current budget, but agrees that the medium-term funding gap approaches £5 billion if no action is taken.
5. Institute for Fiscal Studies
The IFS has also highlighted the increasingly difficult outlook for Scottish public finances and investment, although it tends to focus on the underlying pressures rather than using the £5 billion figure as a headline.
An important distinction
The phrase "£5 billion deficit" can be misleading.
A more accurate description is:
It is a projected funding gap over the next few years.
It is not a £5 billion annual overspend.
It is not debt in the way a UK Government budget deficit is.
Because the Scottish Government must legally balance its budget each year, it cannot simply borrow to cover this gap. Instead, it has to:
reduce planned spending,
increase tax revenues where it has devolved powers,
improve efficiency,
reprioritise programmes,
or receive additional funding from the UK Government.
Why this matters for projects like Thurso
This projected funding gap is one of the reasons analysts are watching large capital projects closely. Even if the Thurso campus remains a high priority, a tightening capital budget could lead to some projects across Scotland being delayed or phased over a longer period rather than cancelled outright.