The Chancellor’s Budget has improved the short-term outlook for Scotland’s public finances but ministers in Edinburgh would be wise to “bank” this year’s money for future investment, economists have said.
The respected Institute for Fiscal Studies (IFS) think tank said Finance Secretary Shona Robison would be wise to carry over some of the additional £1.5 billion allocated to the Scottish Government in the current financial year.
Despite the funding boost from the Labour government’s first Budget, the IFS said tough choices are still ahead for John Swinney’s administration in Edinburgh.
Unless some of the current year’s money is carried forward, increasing Scotland’s health budget in real terms would likely come at the expense of spending in other departments, the think tank warned.
Ms Robison is due to publish the Scottish Budget on December 4 and the SNP will need to negotiate votes from another party in order for it to pass.
An IFS analysis said it is currently unclear how the Scottish Government will be compensated for the rise in employer’s national insurance contributions – which Mr Swinney has said leaves Scottish public services with a £500 million bill.
If this compensation is based on the Barnett formula – which reports have suggested would amount to around £300 million – then some of the bill would have to be met by the Scottish Government’s block grant.
The IFS said that following the Chancellor’s Budget, funding for day-to-day (resource) spending on Scottish public services would be £45.0 billion in 2025–26, up from the £42.7 billion projected last December.
This would be a cash-terms increase of 2.8% and a real-terms increase of 0.4% compared with the current financial year – assuming no money is carried forward from the current financial year.
The think tank said realistic spending plans are needed despite the temptation to announce “goodies” ahead of the 2026 Scottish Parliament election.
David Phillips, an associate director at IFS, said: “The Scottish Government could spend up to an extra £1.5 billion on day-to-day spending this year on top of increases it already made in its autumn budget revision.
“It may be wise to instead choose to bank some of this funding for future years by reducing or even cancelling planned drawdowns in ScotWind (wind farm licences) income and financial reserves.
“That is because despite a further £1.4 billion increase in UK Government funding for day-to-day spending next year, growth in overall funding is set to slow sharply – potentially to well below 1% a year in real terms.”
IFS research economist Bee Boileau said Scotland’s health budget will likely receive a top-up in the current year, along with a number of other departments.
She said: “Looking to next year and beyond, though, unless the Chancellor further tops up UK-wide spending plans, or the Scottish Finance Secretary Shona Robison raises Scottish taxes significantly, the trade-offs between services will be much more challenging.
“If health spending were to continue to grow at the rate seen in recent years, many other areas of spending would almost certainly face cuts – perhaps as soon as next year.”
On Monday, Ms Robison attacked the rise in employer national insurance contributions as “austerity by the back door”, saying reports of a £300 million offer to compensate Scottish public services would not go far enough.
She said: “Labour’s decision will lead to substantial additional costs for small businesses in the private sector and for organisations in the public sector it means the likes of hospices and GP practices face far greater running costs to simply keep their doors open.
“Let me be clear that £300 million simply won’t cover the cost of this hike for the public sector in Scotland.
“The calculated cost of this decision for Scotland’s directly-employed public sector is well over £500 million – and when costs include the likes of childcare settings, colleges and adult social care, it is around £750 million.
“That Labour are trumpeting that they could reimburse less than half of this sum and expect people in Scotland to celebrate is beyond belief – and shows a complete disregard for public services in Scotland.”
