Immediate response to the Scottish Budget and Spending Review

Responding to the Scottish Budget and Spending Review, David Phillips, head of devolved and local government finance at the Institute for Fiscal Studies (IFS) said:

“In this pre-election Budget the Scottish Government has found money for several measures to support families with children, to reduce business rates for the retail, hospitality and leisure sectors, and to increase the basic and intermediate income tax rate thresholds by double the rate of inflation. But the overall outlook for Scottish public finances and services is far less rosy than these ‘toplines’ would suggest. A tight overall funding environment, money for aforementioned giveaways and a focus on the NHS – at least from 2027–28 onwards – means many public services in Scotland are set to see a reduction in their budgets.  

On tax, while the Finance Minister emphasised the giveaways – including the increases to the basic and intermediate income tax thresholds and new business rates reliefs –, the biggest policy announced was a tax rise: freezing the top three income tax thresholds until April 2029, which will drag more taxpayers into higher rates of tax. This mirrors UK government policy, although previous tax increases on higher earners mean they face substantially higher income tax in Scotland than in the rest of the UK. Planned new council tax bands for the most valuable properties also mirror UK government policy – and as in England risks wasting an opportunity for a much needed full scale revaluation of council tax.

On the spending side of the budget, it’s a game of two halves. Both parts of the game involve only very small increases in overall day-to-day spending on public services – just 0.6% above inflation in 2026–27, and 0.2% above inflation a year on average over the following two years. 

In the coming year though, the Scottish Government addresses this by proposing increases in health and social care spending of just 0.7%. This allows it to avoid cuts to other services, but without heroic improvements in productivity will almost certainly not be enough to maintain let alone improve services. Top-ups to health and social care funding seem likely, which may mean the next government having to raid other budgets part-way through the year. 

From 2027–28 onwards, the Scottish Government proposes much bigger increases in spending for health and social care averaging 2.4% a year, but that means cuts to spending on other services. On average, these amount to 1.7% a year. Local government and finance is set to see reductions averaging 2.1% a year in real-terms, which would require council tax increases of around 8% just to hold budgets constant.

Finally, an analyst’s gripe. The Scottish Government continues to make it more difficult than needed to understand and analyse its spending plans. In her Budget speech, Shona Robison once again highlighted changes in funding for councils that compared the plans for the coming year with the initial plans for this year – ignoring hundreds of millions of top-ups councils have received this year, including for higher employer NI bills. Those costs and pressures will remain next year and so comparing plans to figures for this year which exclude them flatters the planned changes in funding. And the Budget document continues to bury the most appropriate spending figures in an annex, with the main body including figures for this year and next that just cannot be meaningfully compared – a recipe for confusion. That isn’t good enough – especially in an election year, when the electorate deserve a clear picture of how tax and spending are changing.”

Additional analysis

Scottish tax and benefit policy

• The basic- and intermediate-rate income tax thresholds will be increased by 7.4% in April 2026 at a cost of £52 million. This will reduce the income tax bills of most basic-rate taxpayers by £5.50 in the coming financial year compared to standard indexation, with reductions of £15.50 for most people in higher bands. It also means most basic-rate taxpayers will pay £40 per year less in income tax than they would under the system in place in the rest of the UK (rUK). 
• However, the higher-, advanced- and additional-rate thresholds will be frozen not only in 2026–27 as previously announced, but also in 2027–28 and 2028–29, raising £232 million a year by that latter year. While this mirrors freezes in tax thresholds in the rest of the UK, previous changes in tax rates and thresholds mean that a taxpayer with an income of £50,000 will pay around £1,480 more in tax than under the rUK system in 2028–29, and a taxpayer with an income of £125,000 will pay around £5,200 more.
• Two new council tax bands based on up-to-date property values will be introduced from April 2028 for properties worth more than £1 million, with the rates still to be determined. This follows a similar announcement by the UK government for England in last November’s budget. As with England, though, what is really needed is a full revaluation of council tax – rather than tacking on new tax bands based on current values for less than the top 1% of Scottish properties, while using 35-year-old values for all other properties. With the Scottish Government consulting on wider council tax revaluation and reform, it would be a missed opportunity if the new council tax bands limit future reform. Instead they should be a stepping stone to wider reform.
• A new business rates relief reducing bills by 15% for retail, hospitality, and leisure (RHL), applied to properties with a value up to £100,000 and capped at £110,000 per business, will be introduced from April 2026. This will be a little more generous than the equivalent lower tax rate in England for small businesses, but less generous for larger businesses occupying multiple properties due to the cap. Part of the benefit will flow to landlords in the form of higher rents as demand from RHL occupiers increases. This could increase property costs for businesses ineligible for the reliefs but which compete with the RHL sector for properties. 
• On the benefits side, a new £40 per week ‘baby’ rate of the Scottish child payment for children under 1 year of age will be introduced from April 2027, an increase of more than a third. This will boost the income of families in receipt of the child payment with one baby by £580 in the first year of their child’s life.  

Public service spending plans in 2026–27

• Compared to the latest plans for this year (including in-year top-ups), total day-to-day spending on public services is set to grow next year by just 0.6% after accounting for forecast inflation. Despite the Finance Minister highlighting her focus on the NHS, the Health and Social Care portfolio is set to see funding increase only a little above the average – by 0.7%. This is likely to be far below health funding needs: in its Medium Term Financial Strategy published last year, the Scottish Government assumed that health and social care funding needs would increase by over 3% a year in real terms. It therefore seems likely that these plans would need to be significantly topped up during the course of the year if NHS performance is to be maintained, let alone improved.
• The second largest area of spending, the Finance and Local Government portfolio, is set to see a below-average increase of just 0.3% in real terms – far less than the 2% claimed by the Finance Minister, which was based on a misleading comparison of plans to initial rather than the latest budget for the current year. 

• Relative winners in the coming year include the Deputy First Minister, Economy and Gaelic portfolio, increasing by 5.9%; the Transport portfolio, increasing by 4.1%; and the Justice and Home Affairs portfolio, increasing by 2.1%.

  Plans for 2027-28 and 2028-29

• Alongside these Budget settlements for next year, the Scottish Government also published a multi-year Spending Review, setting out portfolio-level spending plans up to 2028-29 for day-to-day spending and 2029-30 for investment spending. Day-to-day spending on public services is set to fall slightly in 2027–28, by 0.2%, before growing by 0.6% in 2028–29. Health and Social Care spending is set to grow much faster than average for these later years, by 2.5% in 2027–28 and 2.3% in 2028–29. While this is more realistic, it remains below the Government’s assessed needs for health funding. 

• There are considerable cuts to almost every other portfolio after 2026–27, excluding just the Transport and the Constitution, External Affairs and Culture portfolios. In particular, the Finance and Local Government portfolio is set to be cut by an annual real average of 2.1% between 2026–27 and 2028–29, the Justice and Home Affairs portfolio by an annual real average of 2.0%, and the Education and Skills portfolio by an annual real average of 1.5%.

  Fiscal risks to the Spending Review

• When assessing the Scottish Spending Review, it is important to recognise the challenges the Scottish Government faces in predicting how much funding it will have available and hence can allocate to services. Its funding depends to a large extent on decisions by the UK government, as well as uncertain forecasts for tax revenues and social security spending. Combined with the limited borrowing powers it has to offset any changes in its funding, this means the multi-year plans set today could be subject to significant revision – even if there is not a change in government at the upcoming Scottish elections.
• On the one hand, as we highlighted in November following the UK Budget, current UK government spending plans imply very tight budgets, especially for 2028–29 and 2029–30. As these years – and the next UK election – approach, the UK Chancellor may feel the need to top-up spending plans, which would generate additional funding for the Scottish Government via the Barnett formula. The next Scottish Government could then choose to top up overall spending plans or reduce taxes.
• On the other hand, as we highlighted this time last year, there is a risk that the forecasts for the net revenues from devolved taxes that the Spending Review plans are based on are over-optimistic. This is because these forecasts effectively assume that Scottish earnings (which affect Scottish income tax revenues) grow more quickly than earnings in the rest of the UK (which affect the offsetting block grant adjustments). If that turns out not to be the case, the next Scottish Government could find itself having to cut back spending to the tune of several hundred million pounds.  
   

The IFS will be publishing a short report in partnership with Scottish Financial Enterprise in early February which looks in more detail at the Scottish fiscal outlook and borrowing plans. The IFS is an independent Research Institute. As with all pieces of our work, the IFS has full editorial control over its analysis and conclusions.