Scotland is set to face substantial cuts to public spending due to a projected £658 million real-terms decrease in day-to-day funding for the upcoming year, according to a warning from the Scottish Fiscal Commission (SFC).
The SFC, the government's economic forecaster, anticipates that resource funding, which supports public services like the NHS, police, and local councils, will see only a marginal increase from £54.97 billion this year to £55.34 billion in 2027-28. When adjusted for inflation, this represents a significant decline.
Several factors contribute to this projected reduction. A record high income tax reconciliation of £720 million, where the block grant from the UK government is adjusted due to discrepancies between forecasted and actual tax revenues, is a key contributor. Additionally, the rising cost of Scotland's benefits bill is impacting the budget.
If public sector pay deals exceed current projections, the required spending cuts could be even more severe. The SFC also noted that Scotland's income tax revenues would have been £888 million higher in 2024-25 had its economy grown at the same pace as the rest of the UK. This "economic performance gap" is attributed to slower growth in average earnings and employment in Scotland compared to the UK, potentially influenced by policy decisions such as tax increases.
These fiscal projections place new Finance Secretary Jenny Gilruth under pressure to detail how public spending will be reduced to balance the budget.
Professor Graeme Roy, chairman of the SFC, stated that the Scottish Government faces "significant challenges in balancing future budgets." He emphasized that the successful delivery of planned savings, management of workforce costs, and the implications of the upcoming UK Budget will be crucial in determining the funding available for public services. "Transparency on the delivery of planned efficiencies and the scale of emerging pressures will help parliament and the public understand the choices that lie ahead," Professor Roy added, describing the outlook as "exceptionally difficult" and "really quite challenging."
João Sousa, a senior research economist at the Institute for Fiscal Studies, commented that the SFC's fiscal update suggests a "stormier outlook for future years" and "a particularly tough set of choices" for Gilruth as she prepares the budget for the 2027-28 financial year.
Scottish Conservative finance spokesman Craig Hoy criticized the situation, stating that after 19 years of the SNP's governance, "the chickens are firmly coming home to roost" due to an economy that is falling behind the rest of the UK. Scottish Labour finance spokesman Michael Marra echoed concerns, noting that "brutal budget cuts are looming" but the SNP has yet to disclose its plans.
In response, Public Finance Minister Hannah Mary Goodlad affirmed that the Government "has delivered a balanced budget every year despite the challenging financial environment and will continue to take a responsible approach to managing the public finances."