The Scottish Government faces a fiscal reckoning – with spending cuts or tax rises on the way

John Swinney has chosen his Cabinet, and is set to lead the SNP into its third decade of governing Scotland. The party has 57 out of 127 seats in the Scottish Parliament, and it seems likely to form a minority government, rather than attempt to form a coalition or develop a formal cooperation agreement with one of the other parties.

The distribution of seats in the Scottish Parliament – with each of the other parties having between 10 and 17 seats – means that the support of one other party would be sufficient to pass legislation. This means that the SNP may be able to forge common purpose with different parties on different issues – including on passing the Scottish Budget bill each year. Doing this may be easier for some issues than others, for example.

The big financial squeeze

As we and others have repeatedly highlighted, the fiscal outlook facing the Scottish Government is extremely challenging. Scottish Government funding for day-to-day spending on public services increased by an average of 2.3% a year above economy-wide inflation between 2019–20 and 2025–26. Looking ahead, it is set to grow by an average of just 0.6% a year above inflation in 2026–27, 2027–28 and 2028–29, based on current plans for UK government funding and official forecasts for devolved tax revenues. And the path for funding is far from even, with modest increases in 2026–27 and 2028–29 sandwiching a projected cut in overall funding for day-to-day spending of 1.3% in 2027–28 – the first full budget for new ministers.

Following top-ups to funding from the UK government announced in the Spring Statement, around £542 million of new funding has yet to be allocated in the current financial year. This falls to just £13 million in 2027–28, before rising again to £345 million in 2028–29. This might seem like a handy ‘war chest’ for new ministers wanting to make their mark. However, our view is that most, if not all, of this funding will need to be allocated to the NHS if the Scottish Government wants to avoid reductions in staffing and falls in service quality. Existing spending plans for 2026–27, set prior to the confirmation of the funding top-ups, imply day-to-day spending on the non-social-care parts of the Health and Social Care portfolio falling by 0.6% in real terms even before accounting for higher inflation as a result of the Iran War. In cash terms, the existing plans equate to a 1.6% rise in spending – far lower than the 3.75% pay increase agreed for nurses and other staff covered by the ‘Agenda for Change’ agreement and the 9.4% average increase agreed for resident doctors. Without very substantial improvements in productivity, existing spending plans are therefore simply inconsistent with maintaining, let alone improving, NHS performance.

In order to channel money into health and social care services from 2027–28 onwards, the Scottish Spending Review published in January pencilled in cuts to a wide range of other areas of spending – including the Finance and Local Government, Education and Skills, Justice and Home Affairs, and Rural Affairs portfolios – averaging 1.8% a year on average in real terms.

To help reduce the impact of such cuts on services (as well as to maximise the return on the increases in funding for health and social care services), the Scottish Government is aiming for big improvements in public sector productivity. This includes a 20% (£1 billion) reduction in what it terms ‘corporate costs’ (effectively back-office staff, estates and procurement), a reduction in the public sector workforce, and annual improvements to NHS efficiency of 3%. Some specific areas for savings have been identified, but public sector employment continued to grow during 2025 (the first year covered by the workforce reduction plan), and published portfolio-level plans for savings do not clearly relate to either the corporate cost or workforce reduction targets, making it hard to assess progress towards meeting them. There is therefore a significant risk the targets will not be met.

And official projections for funding may understate how tough the outlook is over the next few years. First, they do not account for the recent increase in inflation – which is now expected to be around 1.4 percentage points higher during 2026 than prior to the Iran War. Second, official funding projections implicitly assume that earnings in Scotland will grow faster than those in the rest of the UK, boosting devolved government tax revenues. This is not because the Scottish Fiscal Commission, which makes forecasts for Scotland, expects earnings in Scotland to grow faster than those in the rest of the UK – it is just a little more optimistic about earnings growth in general than the Office for Budget Responsibility, which makes forecasts for the UK as a whole. If earnings instead grew in line with the rest of the UK, Scottish Government funding may be around £0.5 billion lower in 2028–29 and £1 billion lower in 2030–31 than official projections imply. And there is a risk that earnings grow slower than in the rest of the UK as they did between about 2015 and 2022, which would further reduce the Scottish budget. For example, if rather than outpacing earnings growth in the rest of the UK by 0.4% a year, on average, they lagged by 0.4% a year, protecting health and social care spending from the resulting funding shortfall would deepen the cuts to other spending from 1.8% a year in real terms to 3.9% a year in real terms in 2027–28 and 2028–29.

Official spending plans therefore already entail significant cuts to some areas of spending, and build in assumptions of significant savings and productivity improvements. And they may underestimate the scale of the challenge given recent higher inflation, and seemingly upward-biased tax revenue forecasts.

New ministers will therefore face very tough trade-offs in an already stretched Scottish budget. They will need to be very clear about their priorities for both existing services and the SNP’s manifesto pledges – there is unlikely to be the fiscal or political space to deliver every pledge, which together the SNP estimate would cost £1.4 billion a year by 2030.

Property taxation

One area where the SNP may finally be able to make significant progress is property taxation.

It has been calling for the replacement or reform of council tax for 20 years. Prior to the elections, the Scottish Government undertook a consultation on council tax revaluation and reform between October 2025 and January 2026. However, the then Finance Minister downplayed the prospects for implementing any significant reforms in the new parliamentary term (suggesting it would not happen before 2030, and so be unlikely before the scheduled 2031 elections), arguing that ‘consensus around a unified position’ was needed. However, in January 2026, the Scottish Government announced plans for a ‘mansion tax’ on properties with a value of £1 million or more in the Scottish Budget, with no consultation and no need for a consensus. If this is a stepping stone to wider reform, this may be useful; it would be a very poor end point, leaving council tax unreformed for well over 99% of taxpayers.

The SNP manifesto continues to highlight the need for ‘consensus’, but says a cross-party agreement on reform would be a ‘high priority’ for the new parliamentary term. With Scottish Labour, the Scottish Liberal Democrats and the Scottish Green Party – who together with the SNP account for over three-quarters of seats and two-thirds of the votes cast in the Scottish Parliament election – also in favour of reforming council tax, there would appear to be scope for such an agreement. In addition, having already consulted on a range of options, and needing to undertake a wide-ranging statistical valuation exercise to identify which properties are valued at £1 million or more for the ‘mansion tax’ due to commence in April 2028, it should be feasible to implement reforms prior to 2030: for example, in April 2029. There is likely to be scope for significant learning from Wales and the UK’s Valuation Office, including on its hybrid statistical-and-judgement based valuation methodology.

Revaluing and reforming council tax would make a key part of the tax system fairer. It could be done in a way that aimed to be revenue-neutral, revenue-reducing or revenue-raising, depending on the Scottish Government’s objectives – although its ultimate effects on revenues would depend on councils decisions’ on what tax rates to set. A revalued and reformed council tax could also form part of a wider reform to property taxation that encompassed business rates and land and buildings transaction tax (LBTT) – which offers an even bigger prize in terms of the fairness and efficiency of the tax system.

Smaller child- and health-related pledges

Another area where progress could be relatively straightforward is the delivery of a range of smaller pledges on child- and health-related services, which could signal further progress towards broader SNP objectives for a relatively modest cost.

Several pledges could be linked to aims to improve education and tackle poverty and the cost of living for families with children. For example, legislation to ban phones from Scottish classrooms would be in line with pledges by other parties too, and come with minimal cost. Uprating means-tested school clothing grants with inflation would cost just £1.4 million a year by 2030. Proposals to give all pupils starting primary school a ‘welcome to school bag’, including stationery, books and resources to promote literacy and numeracy, would cost £6.5 million a year (or around £140 per bag), and have already been framed as building on the popular ‘baby box’ scheme.

Plans to expand free school meals to more pupils could also garner support from other parties. The SNP manifesto proposed to roll out free meals to all pupils in the top two years of primary school (they are already free for those in the first five years), which may cost around £40–50 million a year. An alternative would be to expand provision to more pupils in secondary school – for example, to all pupils in receipt of universal credit or the Scottish child payment, rather than just the poorest. This would mirror plans in England and Wales, and proposals by the Scottish Labour Party, and would cost a broadly similar amount per year once rolled out – and be better targeted at reducing child poverty.

There are also a range of proposals related to the health service, including several related to plans to shift a greater share of the budget outside hospitals. As we have highlighted before, this is likely to be challenging in the context of acute pressures on hospital services. But all parties stated a desire for such a shift, and schemes such as ‘health MOTs for the over 40s’ (£10 million), one-stop community diagnostic hubs (£10 million), increases in the dentistry workforce (£10 million) and mental health support for children diagnosed with a chronic or life-threatening condition (£3 million) could be modest but tangible steps in that direction.

Expanded subsidised childcare provision

The biggest single spending pledge in the SNP manifesto was an expansion of subsidised childcare, including wrap-around provision for primary-aged children – a pledge made in the 2021 election too, but never enacted.

While full details are lacking, the scheme would entail subsidies that vary according to both the age of the child and the income of their family. Primary-aged children from better-off families could expect up to £1,400 a year in subsidies, while the youngest children from poorer households would be entitled to over £11,000 in subsidies – equivalent to the cost of a full-time childcare placement for a year. The biggest beneficiaries of such a scheme would be low-income out-of-work families, as low-income in-work families can already claim up to 85% of the cost of childcare via universal credit.

While the details of what they proposed differ significantly in scale and scope, all other parties bar Reform UK also proposed expanded childcare provision – so finding support for some variant of the SNP’s plans is unlikely to be the main challenge.

Finding the necessary funding is likely to be a bigger challenge.

The £540 million per year that the SNP estimate their plan would cost is not an impossible amount of money to find by any means: it is equivalent to just over 1% of projected public service spending by the Scottish Government in 2030. It is also roughly the amount that would be raised by increasing each rate of income tax by two-thirds of a percentage point. But in the context of the severe fiscal pressures highlighted at the start of this comment, it would mean some combination of reductions in planned increases in healthcare spending, deeper cuts to other spending and increases in devolved taxation. New ministers will therefore need to decide whether to make such choices, or to pare back their plans for childcare to ease trade-offs elsewhere.

Legislated caps on food prices

A proposal where the biggest constraint may be legislative (or at least legal) is mandated caps on the prices of certain food items, to be set by ministers following consultation. So far at least, no other party has publicly supported the plans – although the Scottish Greens are in favour of property rent caps and have argued for tougher regulation of supermarkets (albeit in the context of how they treat suppliers).

Even if support is found in the Scottish Parliament, the policy may face a challenge from the UK government or from affected businesses. Contrary to some reporting, the UK Internal Market Act does not prevent such price caps, but it does provide a route for affected businesses to challenge the policy. And the UK government may argue it strays into a reserved area (consumer protection), with the public health benefits of the policy being secondary to any direct effects on consumers’ cost of living.

Prioritisation and compromises will likely be needed

The returning Scottish Government will therefore face tricky decisions over what proposals to prioritise in a difficult fiscal environment, and with a need for agreement (or at least acquiescence) from at least some other parties, which will share some priorities but have different views on others. The above list is by no means exhaustive of the areas where progress may be easier or harder.

With five years ahead and a particularly tricky budget looming for 2027–28, new ministers should waste no time in identifying their most important priorities – and putting in place a strategy to deliver them.