In this Scottish Budget the silences were loudest

It’s hard to see how the Scottish Government can claim – as it does in its Budget document – to be running a “sustainable pay policy.” It’s also hard to square these pay deals with the allocation of just 0.7% growth in real terms for the Health portfolio… Fraser of Allander budget report, authors João Sousa, Ciara Crummey, Spencer Thompson

 

The devil was very much in the detail and in what wasn’t said by Shona Robison.

The Cabinet Secretary chose to talk about policies such as higher bands of council tax on million-pound-plus properties and increases in the Scottish Child Payment for children under the age of one, but neither takes effect in the next financial year.

What does take effect in less than three months’ time is a significant cut in spending, even if you wouldn’t know it from the Budget speech. Relative to plans laid out in June, the Finance Secretary has had to cut day-to-day spending by £480 million, largely due to much weaker underlying tax forecasts from the Scottish Fiscal Commission. This was on top of further uses of exceptional items and non-recurring revenues in the region of £300 million.

This Budget then was another example of the Scottish Government plugging an underlying deficit of over half a billion pounds with one-off funding pots – and even then having to make significant cuts to its planned expenditure.

On the capital side, as we trailed last week, the Scottish Government had to face up to a difficult funding reality. Despite a little bit of extra borrowing, it has amended its plans down by £850 million for next year. We will be going through the documents to see how this falls area by area, but it is a clear recognition that its original plans were unaffordable.

The Scottish Spending Review and Infrastructure Investment Plan will take longer to digest, so we’ll be going through those in due course.

One area where there is more detail is income tax, with the Finance Secretary making much of the increase in the amounts of tax paid at 19% and 20%. This was a significant increase (7.4% on each of the thresholds), but it still keeps the difference for taxpayers below the median income at a maximum of £40 a year, or 75p a week. All higher thresholds remain frozen, bringing in significant revenue from fiscal drag – and the Scottish Government has revealed plans to keep them frozen for an additional two years.

Another case of delaying adjustment into the future

It is unfortunate just how difficult it can be to get a clear picture of the funding position of the Scottish Government, but the table below brings together resource funding and planned expenditure set out in the Budget.

Table 1: Changes in funding and expenditure since our Budget Report

Source: SFC, Scottish Government, FAI analysis

This confirms the continuation of a pattern that we highlighted in our Budget Report. The Scottish Government is again forecast to run a significant underlying deficit of around £659 million, which is actually higher than we had originally predicted and reflects the worsening of tax forecasts (more on this below), and despite a significant cut to planned spending. Further use of one-off or exceptional revenues includes drawing down another £150 million from the Scotland Reserve, a distribution from the Non-Domestic Rates pool £90 million above receipts for the year, and another £50m of Crown Estate revenue used for day-to-day spending.

Despite this tight settlement, it’s unclear how the Scottish Government will be able to make the sums add up. In August, the Scottish Fiscal Commission warned that pay deals were running well ahead of the pay policy, and news since then have been similar. The SFC forecasts average earnings in the devolved public sector to grow at 4.6%, which will be well above the 3% in the pay policy for next year even after accounting for projected falls in headcount.

It’s hard to see how the Scottish Government can claim – as it does in its Budget document – to be running a “sustainable pay policy.” It’s also hard to square these pay deals with the allocation of just 0.7% growth in real terms for the Health portfolio, which the SFC have helpfully laid out after reversing transfers in the ABR that weren’t baselined.

We know that the Scottish Government laid out ambitious targets for efficiencies in the public sector in the Fiscal Sustainability Delivery Plan, but the underlying assumptions that are required for these settlements border on heroic. It would be no surprise to see an emergency statement in the coming year if pay deals continue to burst through the stated pay policy – especially given that a few are already automatically inflation-protected.

Capital spending was slashed significantly

As we mentioned last week, something had to give on the investment side, and it is no surprise that it was the Scottish Government’s plans that budged. Even after some additional borrowing to go to the limit permitted by the Fiscal Framework, the Cabinet Secretary for Finance still had to lay out plans for a 10% cut (£860 million) to the plans she had laid out just this past June.

It will take us a while to get through the Infrastructure Delivery Pipeline, the much-anticipated update to the Infrastructure Delivery Plan last update, but an initial look shows that some projects have been on a “development” rather than delivery pipeline – which may appear a subtle difference, but crucially the Scottish Government has so far allocated no funds for these projects. While the document says that “[t]he strategic outline case has been made and is a Government commitment,” those of a more cynical disposition might see it as a staging post for significant delay or eventual cancellation.

Examples of these include the A96 programme, including the Nairn Bypass – which was recently in the news – as well as the renewal programme for the Highland Mainline and the redevelopment of the Ardrossan Harbour.

Income tax forecasts have been revised down significantly for 2026-27

Income tax forecasts are down by £274 million for 2026-27, compared with December 2024. Only £50 million of this reduction is driven by policy decisions to increase the basic and intermediate rate thresholds by 7.4%.

The remaining £224 million reduction comes from a combination of lower outturn data, that is partly offset by higher earnings and employment growth.
Lower outturn data can be broken down into two parts:

• Lower than expected Scottish Income Tax outturn for 2023/24, which is largely driven by lower growth in Income Tax paid through Self-Assessment. This affects the forecast for 2026/27, as it reduces the amount of tax expected to be raised from self-assessment in 2026/27.
• Reductions in Pay As You Earn (PAYE) Real Time Information (RTI) so far this year, which are projected forward for what income tax receipts will be 26/27.

Higher earnings growth and employment growth increase the revenues as more people are in work and earning higher wages than expected in the December 2024 forecast.

The changes to thresholds at the basic and intermediate rate were the flagship policy of this Budget – but it’s worth noting just how little they change the marginal rate schedule, as chart 1 shows.

This is borne out by the fact that the maximum benefit to any taxpayer is £32 a year – or 62p a week. But because everyone above those thresholds benefits – including people on the very highest incomes – this very small change in tax liabilities costs over £50 million.

Scottish Child Payment increased for under-1s – but not for another 18 months

The Scottish Child Payment is to be increased to £40 for children aged under one. The SFC have assumed this will be introduced in mid 2027-28, at which point the main rate is forecast to be £28.85.

The SFC expect around 12,000 children to receive this increase payment at a cost of around £7 million per year from 2028-29 (£3 million in 2027-28 due to mid-year introduction).

There is a good rationale for providing a higher rate of SCP for young children. Families with children under 1 face an elevated poverty rate and are one of the six child poverty priority groups.

Some additional detail on the two-child limit removal and child poverty

The SFC have included revised estimates of the savings (and spillover costs) of the two-child limit (2CL) removal. The previous gross figure of £155m in 2026-27 has been revised to £141m with new data.

From that, the SFC think £14m will go to spillovers. We originally estimated around twice this, but starting from £155m. So the net saving to the Scottish Government is £126m. Note that there’s no effect on the spending forecast from the SFC’s perspective when compared with December 2024 because two-child limit mitigation was never included in the last set of budget forecasts.

Unfortunately – though not unexpectedly – the Scottish Government have not clearly set out how these savings will be recycled into child poverty reduction policies, only that they will. The policies quoted in the Eradicating Child Poverty section include a mix of new and existing policies, a mix of different time periods, and a mix of universal and targeted policies – so very much a familiar story. More generally, there is no distinction between the £126m pot and child poverty spending in general.

The only child poverty spending that looks be truly additional (though some of it may still have happened anyway):

• Introducing the new SCP premium for babies (£3 million but not till 27-28, rising to £7 million a year thereafter);
• Additional spend on school-day wraparound activities (£2.5 million); and
• Additional funding to expand Free School Meals to include households on Pension Credit and those affected by changes to UC thresholds (£3 million).

Then some ones that probably include some additional spending but are unclear:

• Additional funding for breakfast clubs and services (£15 million in 26-27, though this is probably the total, with 25-26 spending being £3m);
• Whole Family Support package to support parents into sustainable employment (£50m, but likely a multi-year figure, likely includes some existing spending);
• Boost to the Tackling Child Poverty Fund (£49m, but not clear how this will ultimately be spent and there could be some double-counting).

This is then followed by a long list of policies that are not new and/or not really related to child poverty.