Scottish Budget Outlines Key Spending and Tax Proposals for Next Financial Year

Finance Secretary Shona Robison unveiled the Scottish government’s tax and spending proposals for the 2025/26 financial year, which feature a commitment to abolish the two-child benefit cap and adjustments to basic and intermediate income tax thresholds. Additional highlights from the budget presentation included an allocation of an extra £2 billion for the National Health Service and a £768 million investment directed towards affordable housing initiatives. This report outlines five principal aspects of the current Scottish Budget. The most significant declaration within the budget was not directly related to the upcoming year’s tax or expenditure plans. Finance Secretary Shona Robison made a surprise announcement that the Scottish government intends to abolish, offset, or mitigate the two-child benefits cap. This policy, which is implemented across the UK by the Department of Work and Pensions for welfare payments like universal credit and child tax credits, will require time and cooperation from the UK government to implement. The specific method of implementation, its operational details, and the associated costs are currently undefined. The Scottish Fiscal Commission stated that it received the proposal only last week and has not yet had the opportunity to assess its cost, labeling it a “fiscal risk”. This initiative presents a considerable challenge to the Labour party. It follows closely on the heels of a recent announcement regarding winter fuel payments, which was also perceived as an attempt to gain an advantage over Anas Sarwar’s party and cause discomfort for the UK administration. Should the plan proceed as intended, the SNP government aims to commence payments to families of the 15,000 children impacted by April 2026, which is one month prior to the next Holyrood election. Labour has indicated an openness to consider proposals but highlights the absence of any funding allocated for this measure in the forthcoming year’s budget. A more robust response from Labour will likely be necessary as the election approaches. This budget did not introduce significant alterations to the devolved income tax system. Minor adjustments were made to tax thresholds, which are expected to yield political rather than substantial financial effects. Finance Secretary Robison is raising the thresholds for the basic and intermediate tax rates, which represent two of the lower tiers within Scotland’s six-band tax structure. Given that Chancellor Rachel Reeves has maintained a freeze on these thresholds across the remainder of the UK, individuals in Scotland earning under £30,300 will incur a lower tax burden compared to residents in England or Wales. Although this disparity amounts to less than £30 annually, it enables Robison to assert that 51% of Scottish taxpayers will pay less. Council tax is an expenditure item that is highly likely to rise. With the conclusion of last year’s one-off freeze on local rates, the decision regarding increases will rest with local representatives. Instead of imposing a cap, Robison opted to encourage local authorities to restrain increases, asserting that “with record funding there is no reason for big increases in council tax next year”. She announced an additional £1 billion for local government; however, the extent to which councillors will have discretion over these funds, as opposed to them being allocated to ring-fenced areas, is yet to be determined. Annually, the government declares increased funding for councils, which councils then counter by stating it is insufficient, leading to a recurring disagreement over the appropriate level of funding. This cyclical debate is expected to persist until local and national budgets are finalized next year. The total budget exceeded £63 billion, and discussions previously common about difficult choices and austerity were conspicuously absent. The overall tone was optimistic, suggesting that Robison had unexpected funds available for the government’s preferred policies. John Swinney has designated the elimination of child poverty as his primary objective, and funding for the prominent Scottish Child Payment is, as usual, included in the budget. The specific funds for mitigating the two-child cap are not present in this budget, with only an allocation for establishing the system, regardless of its final form. Overall, social security spending has increased by £800 million, underscoring a characteristic of devolved government and the SNP’s inclination towards significant state interventions and welfare safety nets. This increase also encompasses last week’s announcement regarding winter fuel payments, which are set to be partially reinstated starting next year. This week, Mr. Swinney predictably identified the NHS as a central priority, and it has received a record funding allocation of £21 billion, constituting one-third of the total budget. This sum includes nearly £200 million designated for reducing waiting times and funding for local hospital initiatives in Edinburgh, Fort William, and Airdrie. Additionally, billions of pounds have been allocated to net-zero and climate policies, drawing partly from the ScotWind fund—a reserve generated by auctioning seabed plots for offshore wind development, which Robison had previously been concerned might be required for routine operational expenses. Furthermore, £768 million is earmarked for affordable housing, primarily to reverse a reduction implemented during Humza Yousaf’s administration last year, ultimately resulting in increased spending and an anticipated creation of 8,000 new homes in the upcoming year. Economic growth has been a significant focus for governments throughout the UK, with Rachel Reeves positioning it as central to her role as Chancellor. Robison similarly stated that a robust economy was “an essential requirement”. The Finance Secretary faced pressure to align with the Chancellor’s support for businesses in the retail, leisure, and hospitality sectors, which included a 40% relief on business rates. While Scotland operates a distinct system of “non-domestic rates,” Robison ultimately declared a comparable 40% relief for the majority of hospitality establishments. Support for retail and leisure sectors was conspicuously absent, apart from some assistance for music venues, and the precise scope of eligibility for this funding remains to be clarified. The Scottish Hospitality Group characterized the offer as “significantly more restricted” compared to that in England, describing it as a “drop in the ocean”. A recurring theme in Ms. Robison’s address was the acknowledgment of her cabinet colleagues as she discussed their respective portfolio responsibilities. This was particularly noteworthy concerning Kate Forbes, an influential figure whom John Swinney appointed to government partly to improve relations with the business community. Forbes emphasized increased funding for town centre regeneration and a threefold increase in investment for the offshore wind supply chain, which is projected to attract ten times that amount in private investment. This strategy, where public funds facilitate substantial private investment, is a preferred approach of Ms. Reeves and forms the fundamental objective of GB Energy. The UK energy firm is expected to be joined by other entities upon its establishment in Aberdeen, as Ms. Robison committed to creating an offshore wind hub in the North East. Lacking a majority in the Scottish Parliament, the SNP requires the support of other parties to secure the passage of its budget. John Swinney has expressed a desire to engage with political adversaries and lead a cooperative administration. However, an agreement with the Conservatives, who advocate for £1 billion in tax reductions, or with Labour, whose primary objective appears to be an election, is improbable. Consequently, the Greens and the Liberal Democrats emerge as the most probable collaborators. Robison intentionally addressed key demands from both parties. Funding for ferries, mental health, and dentistry was included for the Liberal Democrats. The Greens had requested £4.7 billion for environmental policies, to which Robison committed £4.9 billion. While the Greens expressed approval for certain measures, they indicated that “significant further changes” were still necessary, expressing particular skepticism regarding the financial allocations for councils. The Liberal Democrats reacted more favorably to Robison’s announcements, with leader Alex Cole-Hamilton enumerating several initiatives where he believed the government had heeded his input. This draft budget serves as the initial basis for negotiations, which are not expected to culminate until the first votes are cast at Holyrood in February. Nevertheless, the intense speculation about snap elections, which arose following the dissolution of the Bute House Agreement, has diminished. Reaching an agreement with another party remains the most probable outcome.