None of Scotland’s parties has fully faced up to the fiscal reality facing the next Scottish Government

IFS researchers will be presenting a summary of their Scottish election analysis at 1:30pm today at an online event in collaboration with the Centre for Public Policy at the University of Glasgow, and funded by the Nuffield Foundation and the Robertson Trust. This comment highlights IFS researchers’ key conclusions.

David Phillips, head of devolved and local government finance at IFS and one of the speakers at the online event, said:

‘Scottish voters have real choices on 7 May. While there are some similarities between the proposals set out in the major parties’ manifestos, both the broad visions and the specific policies differ significantly. 

‘The Scottish Conservatives and Reform UK offer a vision of a lower-tax Scotland. Income tax would be cut, particularly for the highest-income quarter of Scots – who currently pay substantially more income tax than in the rest of the UK. There would be cuts and reforms to business rates and land and buildings transaction tax too – some reforms beneficial, others wrong-headed. But this lower-tax state would supposedly also deliver more: a better NHS; more securely funded councils; and, in the Conservatives’ case, an expansion of free childcare.

‘In contrast, the SNP and the Scottish Green Party put further expansions of the welfare state and a more activist state front and centre of their plans. Big expansions in free or subsidised childcare, plus free or cheaper buses, would be combined with more spending on existing services. The Greens’ proposals are the most far-reaching, and they propose a range of tax rises and reforms – some beneficial, others deeply damaging – to help fund them. The SNP, in contrast, make few concrete pledges on taxation, with no revenue-raising measures suggested. However, if there was a ‘big state’ rabbit in this election, it was pulled out of John Swinney’s hat: price caps set by ministers for the cheapest varieties of 20 to 50 food items in large supermarkets.

‘Scottish Labour and the Scottish Liberal Democrats lie somewhere in between these ‘right’ and ‘left’ camps. Labour, like the SNP, make few concrete pledges on tax, but would like to cut income tax if economic and fiscal conditions allow. The Liberal Democrats say likewise, and make the case for replacing council tax and business rates with a land value tax. Both parties suggest spending more on certain areas, such as childcare, school staff, and social care. But their plans for new entitlements are pared back compared with the SNP’s and especially the Greens’, leaving more money for existing service provision. 

‘Unfortunately, while differing in their visions, the major parties share a common shortcoming: a lack of realism regarding just how tough the fiscal challenges facing the next Scottish Government are. 

‘The combination of a slowdown in increases in UK government funding, growing demands and costs for health and social care and devolved benefits, and a hangover from some bad budgeting habits of the last Scottish Government, will mean a Scottish budget under significant pressure. The outgoing government has already pencilled in cuts to funding for a range of services – including councils, the police, and further and higher education – in 2027–28 and 2028–29. And its plans bank on big efficiency savings – including a 20% reduction in overall administration costs and 3% recurrent savings each and every year in the NHS – to try to make constrained funding go further. 

‘In this context, neither expansions of the Scottish welfare state without commensurate tax rises, nor definite tax cuts without similarly definite reductions in spending, are fiscally credible. In reality, there would need to be difficult decisions elsewhere in the Scottish budget to square the circle.

‘The fiscal holes the parties would need to fill differ. Reform UK’s and the Conservatives’ plans for tax cuts are feasible – but only with a cutback in frontline service provision, rather than just back-office ‘efficiencies’. Reform UK’s claim that the proposed tax cuts would boost growth enough to pay for themselves does not stand up to scrutiny. On the other end of the political spectrum, the Greens’ tax plans look like only paying for part of their big spending increases, while the SNP rely on efficiencies and extra growth paying for their spending increases. In contrast, Scottish Labour’s and the Scottish Liberal Democrats’ relatively pared-back plans would create the least additional pressure on the Scottish budget. But Labour’s claims that its policies would increase the size of the economy by more than 2% in just five years is bullish at best, and more likely unrealistic. 

‘One can have sympathy with the situation Scotland’s political parties face. Politics is easier when fiscal conditions allow for spending increases or tax cuts without such difficult choices elsewhere in the budget. Voters, already unhappy after years of only slow economic growth, a rising cost of living, and public services that have failed to recover from the COVID-19 pandemic, may not warm to a dose of cold, hard fiscal reality. But the next Scottish Government will have to face up to it. And as the current UK government has found out, not preparing the public for difficult choices prior to an election can come back to bite you when the electoral dust has settled.’

The parties’ different visions for Scotland 

Both Reform UK and the Scottish Conservatives pledge substantial cuts to Scottish taxes, which they say would be funded to a large extent by improvements to the efficiency of the Scottish Government and the services and benefits it provides. 

Reform would realign Scotland’s income tax thresholds with those of the rest of the UK and set each tax rate 1 percentage point below the rate elsewhere – with the aim of going further, to 3 percentage points lower, by the end of the parliament. These would be big tax cuts, particularly for the quarter of Scottish taxpayers paying the higher, advanced or top rate of income tax, who currently pay substantially more income tax than taxpayers elsewhere in the UK. 

The Conservatives commit to even bigger tax cuts than Reform UK (if we treat the 3 percentage point cut as an ambition rather than a definite commitment). Their income tax cuts would be bigger for low and potentially middle earners than Reform UK’s, but smaller for higher earners. They also propose big cuts to business rates and, if the UK government did likewise, abolishing land and buildings transaction tax for people buying their main home. 

Despite these big tax cuts, Reform UK and the Conservatives say they would deliver substantial improvements in frontline services: better hospitals and primary care; a traditionalist approach to schools; better rail, and particularly roads; and in the Conservatives’ case, a substantial expansion of childcare provision for working families with babies and toddlers. 

The SNP and especially the Scottish Greens put their vision of a bigger, more activist Scottish Government much more front and centre of their manifestos. 

The Greens pledge significant increases in spending on existing services, with smaller school class sizes, 50% more GPs and better-paid public sector staff. They want a range of new welfare entitlements: free buses and dentistry for all; more childcare, and the option for the parents of the youngest children to take a cash payment instead; and a big increase in the Scottish child payment. Buses would be brought into public ownership and private sector rents would be subject to strict caps. To help fund all this, the Greens propose a range of tax rises and reforms, some – such as revaluing and reforming council tax – beneficial, others – such as further increasing and complicating land and buildings transaction tax – deeply damaging. 

The SNP, in contrast, make few concrete pledges on tax. Like the Greens, they propose a big expansion of subsidised childcare – covering children up to age 12, but means-tested based on family income. Buses would be cheaper but not free. Current low pupil–teacher ratios would be maintained, but perhaps not reduced. However, the SNP propose perhaps the biggest intervention in an area of the economy usually left to the private sector: price caps set by ministers for the cheapest varieties of 20 to 50 food items in large supermarkets. Whether a Scottish Government has the power to enact such a policy is unclear. And there could be unintended consequences if retailers restrict the availability of the specific product lines the caps apply to. 

Scottish Labour’s and the Liberal Democrats’ proposals fall somewhere in between these ‘right’ and ‘left’ camps. Both eschew the big new entitlements to services and definite tax cuts pledged by the other parties. If the economy and underlying tax revenues grew faster than planned, though, they would like to reduce income tax. 

Both would extend childcare entitlements somewhat, but to a far lesser extent than the Greens, the SNP or even the Conservatives. Their biggest spending commitments relate to existing services. Labour propose up to 2,000 specialist ‘recovery’ teachers to improve numeracy and literacy among those struggling most. The Liberal Democrats say they want 900 additional nurses, physiotherapists, counsellors and other specialist staff based out of GP practices and community health centres. Without big expansions of the welfare state or tax cuts, there is potentially more funding available for existing services. Even so, the challenge of delivering substantial improvements to services should not be underestimated. 

A lack of fiscal realism among all major parties – albeit to different extents 

Like the other parties, Labour and the Liberal Democrats do not fully confront the fiscal pressures facing the Scottish budget post-election. But the extent of the disconnect between vision and fiscal reality differs between parties. 

Reform UK’s claim that their tax cuts would pay for themselves falls apart under scrutiny. Tax cuts can boost the economy – in a few cases, enough to pay for themselves. But the claim that Scotland is over the top of the Laffer curve for income tax as a whole, and that cutting rates would boost revenues, is not credible. Cuts to ‘net zero’ investment spending could, under the prevailing Scottish fiscal framework, be used to boost investment in roads, for example, but not to pay for tax cuts. The tax cuts proposed and service improvements promised would therefore rely on heroic improvements in efficiency – with very little information provided on how the party would deliver these.

The Conservatives do set out some big cuts to spending on disability benefits, which they estimate would pay for just under 40% of the cost of the cuts to tax and increases in spending on priority areas that they propose. History suggests that the amount saved may fall short of these targets, though. And even if such cuts were delivered, the Conservatives would still need to find up to £3.8 billion a year in efficiencies from back-office functions and non-frontline services – on top of the already substantial savings needed under pre-existing spending plans. 

The Scottish Greens propose billions of pounds a year in additional expenditure. Just four big policies – additional childcare provision, a boost to GP numbers, a higher Scottish child payment, and free buses – would come to £2 billion or more a year when fully rolled out. Other pledges – including free dentistry, smaller class sizes, and better pay and conditions for public sector and social care workers – would come on top of this. The Greens recognise that such a big increase in spending would require increases to taxation, and propose a raft of increases and reforms to Scotland’s property taxes, and a range of new taxes. It seems unlikely these would raise sufficient revenue to cover the full cost of their proposals, though – unless they go further on increasing the rates of tax than they have hinted at. 

The SNP propose less additional spending than the Greens – around £1.4 billion a year, according to their estimates. But they do not suggest any tax increases, instead relying on assumed increases in growth and ‘efficiencies’. While smaller than what would be required to deliver the tax cuts proposed by the Scottish Conservatives and Reform UK without adversely affecting frontline services, these ‘efficiencies’ would still have to come on top of already stretching targets baked into the plans set out by an SNP government only in January. What has changed in the last few months to make the SNP think their previous plans for efficiency savings can now be significantly bettered?

That brings us to Labour and the Liberal Democrats. Their somewhat pared-back offerings on new services, and qualified aims for, rather than specific commitments to, tax cuts, mean their plans would entail the least additional pressure on the Scottish budget. From a purely fiscal perspective, that is a less risky approach. But it does mean there are fewer obvious potential gains from new entitlements or tax cuts for these parties to point towards. 

The scale of the fiscal challenge facing the next Scottish Government should not be underestimated. After increasing by 1.7% in real terms this year, over the next three years (2027–28, 2028–29 and 2029–30), funding for day-to-day spending is currently projected to grow by just 0.3% a year in real terms, on average – even with relatively optimistic tax revenue forecasts. Boosting health spending therefore requires substantial cuts to at least some services – with the outgoing SNP pencilling in cuts to councils, policing and justice, for example. The first budget of the next Scottish Government looks particularly tough: overall funding is set to fall in real terms, before rebounding in later years. 

Constitutional change would be no panacea for these issues 

Specific calls for further devolution have played less of a role in this election than in the 2021 Scottish elections. The Scottish Greens have called for the boundaries of devolution to be tested by legislating in areas where the underlying law defining reserved and devolved powers (the Scotland Act) is ambiguous – including on employment rights. The SNP’s proposals for food price caps are in something of the same vein. In contrast, Reform UK suggest that parliamentary time should be focused on ‘devolved rather than reserved matters’.

The SNP have put a new independence referendum at the heart of their platform. Like the Scottish Greens, they also highlight how independence would give the Scottish Government more powers over tax, spending and the economy.

But as we highlighted in our response to the SNP manifesto, independence is not an escape from the inevitable trade-offs over tax and spending (indeed, in at least the short term, it would make those trade-offs more acute). Scotland could have substantially lower taxes but only with a smaller state. It could have a bigger state, doing more for its residents, but only if those residents pay more. Neither largely unspecified ‘efficiencies’ nor constitutional reform can change that.