Initial Budget Review Highlights Multiple Concerns

The proposed Holyrood budget faced numerous significant tasks: addressing public services in critical need of improvement, reducing child poverty, stimulating economic growth, securing sufficient votes for its passage in February, and establishing the strategic direction for John Swinney to lead his party into the next election. Although the finance secretary remained the same as the previous year, the First Minister (occupant of Bute House) had changed. Mr. Swinney, who has overseen at least nine budgets as finance secretary, intended for this budget to project stability after recent periods of political upheaval and changes in leadership. Consequently, a commitment was made to avoid further divergence on income tax for a minimum of two years. While this offered some measure of stability, it was deemed insufficient by business representatives. They argued that the income tax divergence, intensified by Shona Robison last year and disproportionately affecting higher earners compared to those in England, is hindering recruitment and impeding economic growth. As is often the case with budget statements, the elements not explicitly included often reveal a broader narrative, and early analysis indicates several areas of concern. The allocation of substantial additional funds for the current and upcoming year in Rachel Reeves’ inaugural budget as Chancellor at Westminster enabled Shona Robison to provide a modest real-terms increase to several departmental budgets, alongside more significant increases in capital budgets. The arts sector received a considerable boost. Funding for housing, which had seen a significant cut the previous year, was reinstated. Investment funds for renewable energy were tripled. Rural Affairs was one department that experienced a real-terms budget reduction, eliciting an angry response from landowners. The property sector, which typically garners limited public sympathy, faced a one-third increase in the tax levied on the purchase of second homes, including those acquired for investment or rental purposes. Examining beyond the current year’s allocations and considering the fundamental state of Scotland’s public finances, this budget appears insufficient to address long-term challenges, which have been increasingly highlighted by the Audit Scotland watchdog. The auditor general recently declared the budget unsustainable. A new commitment to offset the Westminster reduction in winter fuel payments for older Scots was announced, which further diminished the budget’s perceived sustainability. Similarly, a prominent promise was made to lift the benefit cap for families with over two children. This proposal reached the Scottish Fiscal Commission too late for its cost implications to be included in its budget report. Scottish finance minister Ivan McKee estimated the cost at £110m. The Fraser of Allander Institute suggested it could range from £150m to £200m annually, while the Institute for Fiscal Studies estimated £200m to £300m. The precise cost remains unknown. Although expectations have been raised, its implementation relies on cooperation from the UK government and requires patience, as it is not incorporated into next year’s draft budget and may not materialize until 2026. This contributes to the increasing proportion of the Scottish government’s budget allocated to welfare, a trend anticipated as more benefits are devolved. However, the funds provided by the UK Treasury to compensate for expenditures it would have made in Scotland had these powers not been devolved are considerably less than the actual amount being spent. To enhance benefits, such as the Scottish Child Payment, the Scottish government must secure an additional £1.3 billion next year. Over just two years, this additional welfare expenditure has increased from almost £500m. This funding cannot simultaneously be allocated to public services, resulting in a real-terms decrease in overall public service spending. The heightened cost to Scotland’s public sector resulting from Rachel Reeves’ significant rise in employers’ National Insurance contributions has been a prominent topic of discussion over the last month. The UK government has clarified that it will provide a formula-based allocation to Scotland, without offering compensation for the comparatively larger public sector workforce or higher Scottish salaries. However, the Treasury has not yet specified this figure. Consequently, the Scottish government has not accounted for either the compensatory funds or the additional hundreds of millions it will likely need to cover the shortfall. Fiscal experts refer to this omission as a “risk.” The previous year’s “risk” involved omitting the public sector pay policy, which, by the time Shona Robison announced it, was already being exceeded due to trade union demands. For the current period, a figure of 3% for this year and 9% over three years has been set. The Scottish Fiscal Commission further assumes that automatic pay progression incurs an annual cost of 1.5%. If the available funds are insufficient to cover this, and if the total payroll expenses are not met, it could necessitate a reduction in workforce numbers. However, Scottish ministers have not commented on this matter, and are not expected to until well into next year. The budget statement mentioned the necessity of public service reform, which could alleviate some of these pressures through improved productivity and outcomes. However, specific details were scarce. Bruce Cartwright, chief executive of the Institute of Chartered Accountants of Scotland and an independent finance commentator, is among those seeking further information. “We rightly heard some very big numbers going into public services, including a record £21bn allocation for the NHS,” he said. “But we need to have honest discussions about the outcomes of these investments.” He added, “There is no point spending more money on health services or schools, if there’s no willingness or incentive to change how we deliver these services. We need to identify how and where things must improve.” He further emphasized, “We also need to see evidence of whether standards have gone up, waiting times have come down, and more crimes have been solved.” Prior calls for reforms to council tax and business rates also lacked specific details, and a new tax strategy, released alongside the budget, merely committed to discussing available options. According to available evidence and expert opinions, the scope for implementing reforms and fulfilling increasing commitments to welfare and free public services is diminishing. Scotland’s income tax revenue is not increasing at the same rate as in the UK, as the Fiscal Commission projects slow economic growth: 1.2% this year, increasing to 1.6% next year, then declining again. Within this context, earnings growth is expected to remain slow, decreasing from 2% to 1.5% next year, and staying below 1% for the subsequent four years. Without accelerated earnings growth, income tax revenue will consistently fall short of expectations. While measures to stimulate economic growth exist, the Scottish Fiscal Commission’s forecasts indicate limited anticipated impact from them. This suggests ongoing financial constraints for the Scottish government beyond the upcoming year.