Submitted by Bill Fernie
24th August 2026
Budgets are what everthing runs on from a household to government and having a realistic picure of whatis happening can help us be in our expectations of whatis possible and coming down the line.
There is an important distinction in the growing debate about Scotland's finances that can easily get lost in the headlines.
Several recent reports have warned that the Scottish Government could struggle to balance its budgets in the years ahead. That sounds alarming, but it is not quite the same as saying that Scotland is about to run out of money or that Holyrood will suddenly be unable to pay its bills.
The Scottish Government is legally required to balance its budget each year, and its most recent figures show that it did so in 2025-26. In fact, the provisional outturn showed an underspend of £358 million on a fiscal budget of around £56.3 billion. That money has been carried into the Scotland Reserve.
So why are there warnings about a looming financial problem?
Because balancing one year's budget is very different from being able to afford the services Scotland wants to provide over the next five or ten years.
That is where the numbers become much more uncomfortable.
The Scottish Parliament's Finance and Public Administration Committee has launched an inquiry into the affordability and sustainability of Scotland's tax and spending plans. At the centre of its concerns is an anticipated fiscal gap of around £4.77 billion by 2029-30.
That does not mean that Scotland has a £4.77 billion hole in its bank account today. It means that, on current projections, the money available is not expected to be sufficient to maintain planned spending and meet anticipated pressures by the end of the decade unless something changes.
And something will have to change.
The Scottish Government's answer is a combination of economic growth, tax policy, public-sector reform and efficiency savings. Its latest spending review aims to generate £1.5 billion of cumulative recurring savings over the spending-review period.
That is a substantial amount of money, but it also illustrates the scale of the challenge. The Government is attempting to find billions of pounds of savings while at the same time protecting public services that are already under considerable pressure.
This is where the debate becomes more complicated than simply asking whether Scotland has enough money.
The real question is whether the Scottish economy and the Scottish tax base are growing quickly enough to support the demands being placed upon government.
The pressures are familiar. An ageing population increases demand for health and social care. The NHS requires more resources. Public-sector pay has risen. Inflation has increased the cost of providing services. Local government is under pressure. Infrastructure needs investment, while businesses and households are themselves dealing with higher costs.
At the same time, economic growth is not especially strong.
That combination is difficult for any government. If the economy grows rapidly, tax receipts can rise without tax rates necessarily having to increase. If the economy grows slowly while the cost of public services continues to rise, the gap between what people expect from government and what government can afford becomes increasingly difficult to manage.
Scotland also has a particular constraint that is sometimes overlooked in the wider debate.
Holyrood cannot simply borrow its way out of the problem in the same manner as Westminster.
The Scottish Government has limited borrowing powers and a set of fiscal rules that constrain how much it can borrow and for what purposes. It is therefore not in the same position as the UK Government, which can run substantial deficits and borrow on the international markets.
For Holyrood, the arithmetic is much more immediate.
If spending pressures grow faster than the available funding, ministers eventually have to find the difference.
That could mean higher taxes. It could mean reducing spending. It could mean delaying projects, changing eligibility for services, finding efficiencies or transferring some of the pressure elsewhere.
And that last point is particularly important.
A Scottish Government budget can remain technically balanced while financial pressure is increasingly felt by other parts of the public sector.
A council may receive less funding than it needs to maintain all its existing services. A health board may be required to find additional savings. A public body may be told to absorb inflationary pressures. A project may be delayed rather than cancelled.
From the perspective of the Scottish Government's accounts, the budget remains balanced.
From the perspective of the person waiting for a service, the distinction may mean very little.
This is why the £358 million underspend reported for 2025-26 needs to be treated carefully.
An underspend can be a sign of good financial management. If a department has found a more efficient way of delivering a service and therefore spent less than expected, that is clearly positive.
But an underspend can also occur because projects have been delayed, vacancies have not been filled, investment has been postponed or public bodies have struggled to deliver what was originally planned.
The crucial question is therefore not simply whether government spent less than its budget.
It is why it spent less.
There is another uncomfortable issue surrounding the Scottish Government's plans to find £1.5 billion of recurring savings.
Efficiency savings sound attractive because everybody supports the idea of government becoming more efficient. The difficulty is that genuine efficiency savings are not always easy to find.
There is only so much administrative waste that can be removed before cuts begin to affect the services themselves.
Closing a building can save money, but somebody still has to provide the service somewhere else. Reducing staff numbers can reduce the wage bill, but it may increase waiting times. Delaying maintenance can save money this year while increasing the eventual bill.
Reform can produce substantial savings, but it can also require significant investment before those savings appear.
This is why the next few Scottish budgets could become increasingly political.
The Government will have to decide what it believes Scotland can afford, rather than simply what Scotland would like to have.
Taxation will inevitably be part of that discussion.
Scotland already has a more progressive income-tax structure than the rest of the UK, and further increases could generate additional revenue. But taxation is not an unlimited source of money.
Higher rates can change behaviour. People can alter where they live, how they structure their income, whether they work additional hours or where businesses choose to invest.
That does not mean that increasing taxes is necessarily wrong. It means that the Government has to consider the economic consequences as well as the immediate revenue raised.
Ultimately, the strongest way out of a fiscal squeeze is a growing economy.
A larger economy produces more jobs, higher incomes, more business activity and a larger tax base. That makes it easier to finance public services without continually increasing tax rates.
But economic growth cannot simply be assumed.
That may be the biggest weakness in any long-term financial plan that relies heavily upon it.
There is also an important lesson here for Highland and Caithness.
The financial pressures facing Scotland will not necessarily arrive in the form of one enormous spending cut announced by the Scottish Government.
They may appear gradually.
A difficult settlement for Highland Council.
Pressure on local services.
Delays to infrastructure projects.
Greater pressure on NHS boards.
Changes to transport provision.
Higher charges.
More difficult decisions about which services can realistically be provided and where.
For people living in remote areas, these pressures can be particularly significant because services are already more expensive to provide and alternatives are often limited.
That is why the Scottish Government's financial position matters far beyond Holyrood.
The debate should not really be about whether Scotland will technically balance its budget.
It almost certainly will, because the system requires it to.
The much more important question is what that balanced budget will actually buy.
A government can balance its books by increasing taxes, reducing spending, postponing investment or transferring costs elsewhere. All of those options can produce a balanced set of accounts.
But they produce very different Scotland's.
The latest figures therefore do not suggest that Scotland is facing imminent financial collapse.
They suggest something potentially more important and much more difficult to resolve: a growing gap between the public services Scotland wants and the resources available to provide them.
That is why the projected £4.77 billion fiscal gap matters.
It is not a bill that has arrived through the letterbox.
It is a warning about where the present trajectory could take Scotland.
The Government can change that trajectory. Stronger economic growth could increase tax revenues. Successful reforms could reduce costs. Spending priorities could change. Tax policy could raise additional revenue.
But none of those outcomes is guaranteed.
So perhaps the most accurate way to describe Scotland's financial position is not that the Government is about to fail to balance its budget.
It is this:
Scotland can balance its budget. The increasingly difficult question is whether it can balance the books while maintaining the level of public services and investment that people have come to expect.
That is a much bigger challenge — and one that will increasingly be felt not just in Edinburgh, but in places such as Highland and Caithness.