New analysis shows that funding for the Scottish Government’s NHS Recovery, Health and Social Care portfolio is currently set to fall by 0.7% in real terms in 2024–25 compared with this financial year, despite official Budget documentation showing a 1.3% real-terms year-on-year increase. The official figures do not include in-year top-ups to health and social care funding added since this financial year’s (2023-24) budget was originally set. So, current plans are for spending next year to be lower than actual spending this year, which suggests we can expect a top-up to the Scottish NHS budget before next winter – potentially by cutting back spending in other areas.

It’s a similar story for local government. Budget documentation shows funding for councils increasing by 6.2% in real terms in 2024–25 compared with the amount originally budgeted this year. But after accounting for this year’s in-year top-ups, the actual planned increase in councils’ funding (including from council tax) is closer to 1.8% in real terms.

The actual situation facing the Scottish NHS and councils is likely to be even tougher than these figures suggest, as their costs are set to rise faster than general inflation (1.7%, according to the GDP deflator measure traditionally used to calculate real-terms changes in public spending). For example, the National Living Wage is due to increase by 10% and the Scottish Fiscal Commission is forecasting overall public sector pay growth of 4.5%.

These are among the findings in the first pre-released chapter, published today, from the Institute for Fiscal Studies’ second annual report on the Scottish Budget.

A second pre-released chapter, also being published today, looks at the outlook for the Scottish Government until 2028–29. Unless the UK government increases funding, this will be another tough period for public spending in Scotland, despite extra revenues from devolved income taxes expected in 2025–26.

On current plans, annual growth in public service spending in Scotland between 2024–25 and 2028–29 will be just 1.0% per year. Even modest growth in health spending would lead to cuts in other public services.

Of course, the UK government could ride to the rescue: it seems more likely than not that increases in UK government funding will turn out to be higher than the Scottish Government and the Scottish Fiscal Commission currently assume. On the other hand, the SFC says that the net contribution of income tax revenues to the budget is more likely to be lower than higher than currently forecast.

If higher than currently planned UK government funding boosted Scottish Government funding by £1 billion in 2028–29, tricky budget trade-offs would be eased but not eliminated. For example, 3.3% and 1% annual real-terms increases in funding for health and local government, respectively, would require cuts of 4% to other services between 2024–25 and 2028–29. On the other hand, in the absence of additional UK government funding, and if net revenues from Scotland’s devolved income tax were £1 billion lower than currently forecast in 2028–29, the trade-offs would be very challenging. Even 2.3% and 0% annual real-terms increases in funding for health and local government, respectively, would require cuts of 9% to other services between 2024–25 and 2028–29.

David Phillips, an associate director at IFS and an author of the reports, said: 

‘By omitting in-year top-ups to spending plans this year, the official Scottish Budget documentation gives a misleading impression of how the amounts of funding available for the health service, councils, and many other services are set to change next year.

‘The Scottish Government has argued that comparing its latest spending plans for one year with its initial budgets for the next year, as we think is better, is problematic. It says this ignores the fact that plans in the next year can change too. And yes, they often do. But plans are plans, and at present the latest stated plan is to spend less on health next year than was spent this year. Surely it helps stakeholders of all types to know what actual year-on-year changes in funding different services can expect, given the latest spending plans – both to understand the choices and financial pressures those spending plans imply, and to argue for the changes they think need to be made.’

Bee Boileau, a research economist at IFS and another author of the reports, said:

‘Looking beyond 2024–25, two things quickly become apparent. First is the significant uncertainty about just how much funding the Scottish Government will have available. Funding from the UK government will depend on how much the UK government decides to spend, and how it is allocated between different services, which we won’t have real clarity on until after the UK general election. And funding from devolved tax revenues will depend not only on how fast revenues in Scotland grow, but also on how that compares with growth in revenues in the rest of the UK, and how accurate the forecasts of both of these are. That’s a lot of moving parts and must be a real barrier to medium-term planning.

‘Second, bar a major economic upswing or further big tax rises, the funding available to the Scottish Government will imply difficult decisions for a range of public services, especially given rising demands and costs for things such as health and social care. Pain is almost certainly coming – but how much will depend on both UK government decisions and the relative performance of devolved tax revenues.’