Immediate response to the Scottish Finance Minister’s announcement of in-year spending cuts

David Phillips, an Associate Director at the IFS and head of devolved and local government finance said:

“Scottish Finance Minister Shona Robison has today announced in-year spending cuts of up to £500 million in order to fund public sector pay deals and other inflationary pressures hitting the Scottish budget. This includes restrictions on recruitment, overtime, travel and marketing across the Scottish Government. Peak-time rail tickets will be reintroduced, and cuts made to budgets that were intended to encourage cycling and walking. Cuts will also be made to budgets for NHS training, mental health, and health and social care transformation as part of £116 million of cuts to non-pay elements of the health and social care budget. Ms Robison also plans to draw down up to £460 million of unspent income from offshore windfarm licences – although hopes further savings may make this unnecessary, so the funds remain available for future years. If this one-off funding is needed then further cuts may need to be made next year.

The Scottish Finance Minister tries to pin the blame for these difficult decisions on Westminster and a lack of fiscal flexibility under Scotland’s current fiscal framework. It is true that even with the top-ups to funding announced by the new Chancellor Rachel Reeves alongside her recent Spending Audit, UK government funding this year is still very tight: Ms Reeves’s plans imply departments and devolved governments having to find one-third of the additional cost of this year’s pay deals, over and above what had already been budgeted, from within existing budgets, for example. And as we have highlighted before, there is a case for giving the Scottish Government some additional borrowing powers to address in-year public service spending pressures, as well as the benefit spending pressures and tax shortfalls that it can already borrow for. The Scottish Government has far fewer options to address pressures than the UK government. 

But the Scottish Government is not blameless here. It was already clear at the start of the year that things were going to be financially challenging, with public sector pay deals of 2–3% likely insufficient to avoid industrial action. The Scottish Government could have held back funding to help meet additional pay and other cost pressures, rather than be forced to make in-year cuts to other spending. A decision to freeze council tax also cost almost double the amount raised from increases in income tax rates on higher earners. Tax policy decisions therefore reduced rather than raised revenues, increasing the pressure on Scotland’s public finances.

As the Scottish Fiscal Commission has highlighted, the last few years have seen the Scottish Government increase public sector pay, and roll out new, more generous social security benefits. These are legitimate things to prioritise. But they do reduce the amount available for other areas of spending and add to budgetary pressures. Previous pay increases, which were more generous than in England, also mean higher pay levels – increasing the cost of further increases.

More difficult decisions are likely next year and beyond given the difficult fiscal outlook. The Scottish Government should use its forthcoming Budget and subsequent Scottish Spending Review to be clear about priorities – and which areas will see cuts – in order to reduce the need for in-year cuts, which are often more damaging.”