IFS response to the Scottish Fiscal Commission's August 2026 'Fiscal Update'

Responding to today’s Fiscal Update from the Scottish Fiscal Commission, João Sousa, senior research economist at the IFS, said:

“Today’s Fiscal Update from the Scottish Fiscal Commission (SFC) shows that taking funding for day-to-day spending and capital investment together, the Scottish Government now has an extra £860 million available to spend this financial year – broadly in line with our estimates published last week.

But as with our analysis, the SFC’s analysis points towards a stormier outlook for future years, and a particularly tough set of choices for the new Finance Secretary Jenny Gilruth in her first Budget covering the 2027–28 financial year. With overall funding set to fall compared to 2026–27, if Ms Gilruth wants to protect the NHS from cuts, she will need to make even bigger cuts to spending on other services.  

The SFC also highlights disappointing progress on some of the headline targets for efficiency savings set out by the Scottish Government. Rather than falling by 0.5% as planned, public sector employment increased by 0.6% in 2025–26. And the SFC sounds a note of caution about the deliverability of the big efficiency savings expected of the NHS – given that Audit Scotland has found that most NHS boards have failed to meet previous efficiency savings targets.  

Alongside the effect of higher-than-expected inflation – including, potentially, on public sector pay awards – the fiscal challenges facing the Scottish Government are now stacking up. Tough decisions and ruthless prioritisation will be needed to square the budgetary circle.”

Further detail on the SFC’s Fiscal Update:

• The SFC estimates that Scottish Government funding for day-to-day (resource) spending is £831 million higher in 2026–27 than their forecast in January. Of this, £570 million is due to the UK government’s decision to cover 90% of the accumulated deficits that English local authorities have run up as a result of their spending on special educational needs services. Education is devolved in Scotland, meaning that this leads to a one-off funding boost for the Scottish Government via the Barnett formula.
• The lack of such funding in 2027–28 is one factor leading to a projected fall in Scottish Government funding next year. Another is that lower-than-forecast net tax revenues in previous years means that the Scottish Government will need to repay some money to the UK government – via so-called ‘reconciliation payments’. These are expected to total £738 million, and while the Scottish Government can borrow up to £670 million to help spread the cost of this, it will need to find £68 million immediately. As previous IFS analysis discussed, there is a real risk that such negative reconciliations will be repeated in future years.
• Higher-than-expected inflation will not only push up the cost of delivering services but is also likely to increase social security benefit spending pressures too. Most benefits are linked to inflation, and the SFC highlight that Scotland’s more generous benefit system means only around 85% of the cost of increasing benefits in line with inflation is covered by UK government funding. The Scottish Government will have to cover the remaining 15% from its other funding.