Scottish Government has ‘limited room for manoeuvre’ in Budget

Finance secretary Shona Robison only has “limited room for manoeuvre” in next week’s Scottish Budget, experts have warned, despite the “significant” additional cash Holyrood ministers will receive from the UK Government.

The Scottish Government is due an additional £1.5 billion for the current financial year and a further £3.4bn in 2025-26 as a result of Chancellor Rachel Reeves’s UK Budget, but experts at the Fraser of Allander Institute said the settlement is still “tricky” for the Holyrood Finance Secretary.

Joao Sousa, deputy director at the Strathclyde University-based think tank, noted £7 out of every £8 spent by the Scottish Government goes on just four areas – health, pay, social security and grants to local government.

“This seriously limits their room for manoeuvre in changing the overall shape of the Budget,” he said.

He added that “figuring out the funding position for 2025-26 has been much more challenging” this year.

Decisions in Chancellor Rachel Reeves’s October Budget have resulted in additional funding for Holyrood ministers PA Media

Dr Sousa said the lack of a medium term financial strategy from the Scottish Government this year had made this “near impossible” – but said the report from the Fraser of Allander Institute “set out the various pressures that the budget is likely to be under”.

It said that despite the increases in funding that have come as a result of the UK Government’s Budget, “the settlement for 2025-26 is still tricky for Shona Robison as she presents her Budget for 2025-26 next week, and she will have limited room for manoeuvre”.

With the public sector wage bill accounting for more than half of the Government’s day-to-day spending, the think tank stressed the “significant bearing” pay rises would have on the overall budget position.

With pay costs recurring each year, rises agreed in 2024-25 – such as the 5.5% for NHS workers – will “have a big impact on the overall budgetary decisions”, the report added.

In addition, public sector workers are on average paid more in Scotland, and given the larger public sector north of the border, the challenges here will be “even more acute”, the think tank said.

Its report stressed how decisions on pay, together with spending on areas like social security – where costs are higher than the funding received from the UK Government – have “put additional pressure on the Scottish Government’s budget”.

Scottish Finance Secretary Shona Robison will present her draft Budget for 2025-26 on December 4 PA Media

When pressures from pay, increased national insurance contributions and restoring the winter fuel payment are all taken into account, the report said that for next year, “there is little in the way of additional funding that isn’t already committed”.

The think tank went on to warn that if pay rises are “higher than planned”, the Scottish Government could need to take emergency action again.

First Minister John Swinney and his predecessors have set out their determination to tackle child poverty, but the report said although spending on this has “grown significantly since 2018-19, it would not be fair to say that it has become a large part of the Scottish budget”.

The think tank noted spending in this area “remains under 3% of all discretionary resource funding”, adding capital spending on child poverty reduction – through for example the provision of affordable housing – has “actually fallen by 13% in real terms since 2019-20”.

A Scottish Government spokesperson said: “The Scottish Budget will prioritise funding to deliver on the First Minister’s priorities, which include growing the economy.

“Last week the Scottish Parliament agreed with the Scottish Government motion that the UK Government should fully reimburse the over £700m costs of employer national insurance contributions to the delivery of public services in Scotland due to the rise in employer contributions and that’s what needs to happen.

“This UK Government policy risks hampering economic growth and damaging public services and whilst discussions with the Treasury are ongoing, we still do not have certainty ahead of the Scottish budget.”