Scottish Budget: Tax and spending in 2024–25

Key findings

1. The headline tax policy measures in the 2024–25 Budget are an increase in income tax rates for taxpayers with annual incomes over £75,000 and a freeze in council tax bills. The former is estimated to raise £82 million after accounting for behavioural responses, while the latter is being funded by the Scottish Government at a cost of £144 million – roughly what councils could have raised from 5% increases in council tax rates. The combined effect of these two measures – at a giveaway of just over £60 million or just over 0.1% of the Scottish budget – is therefore to slightly reduce the funding available for devolved public services and social security spending in Scotland.

2. Taken together, the planned changes to income tax and council tax freeze will be progressive. Low- and middle-income households are not directly affected by the income tax rises and will benefit from the council tax freeze – although this only amounts to around a 0.1% boost to disposable income on average. In contrast, the highest-income tenth of households will in many cases see a much bigger increase in income tax bills than they will save in council tax, reducing their net income by an average of 0.7%. When combined with the freeze in the income tax higher-rate threshold (which was already built into tax revenue forecasts but only officially confirmed by the Scottish Government in the Budget), the hit to incomes will amount to an average 1.1% for households in the top tenth of the income distribution, 0.5% for the next-highest tenth, and an average of 0.4% across all households.

3. While the latest increase in income tax rates has added £82 million to tax revenue forecasts in 2024–25, the Scottish Fiscal Commission’s (SFC’s) latest forecasts for the net contribution of income tax to the Scottish Government’s budget next year have been revised up by a much larger £712 million compared with its December 2022 forecasts. This reflects final out-turn data on Scottish income tax revenues in 2021–22 and on earnings, as well as the latest estimates of PAYE tax receipts, in 2022–23 and 2023–24 – where Scotland appears to have been outpacing the rest of the UK, after several years of falling behind.

4. UK government funding in 2024–25 will also be higher than previously assumed. All told, the funding available to the Scottish Government in 2024–25 for day-to-day public service spending is now around £1.7 billion higher than was expected in December 2022, and £2.6 billion higher than was expected in May 2022 when the Scottish Government’s multi-year Resource Spending Review was published. Much-higher-than-expected inflation over this period means this cash-terms boost of 6.7% only translates into a real-terms boost of 0.7%.

5. Turning to year-on-year comparisons, figures in the Scottish Budget 2024–25 show day-to-day public service spending rising by 2.2% in real terms compared with the original budget totals for 2023–24. However, the 2023–24 spending plans have been increased since first being set; the SFC’s December forecasts suggested that these top-ups amount to around £1.0 billion. Accounting for these would imply that the amount available for public service spending will actually fall by 0.4% in real terms between this year and next. The Scottish Government’s 2023–24 Spring Budget Revision, published on 1 February suggests even-bigger-than-expected in-year top-ups, implying a 0.6% real-terms fall in public service spending next year. 

6. The funding available for capital spending has not been topped up to the same extent over the last two years, meaning higher inflation has eroded its real-terms value more. Capital funding in 2024–25 will be around 3.3% lower in real terms than expected in May 2022. It will also be 0.7% lower than in 2023–24.

7. As with overall funding for public services, the spending plans for specific service areas ignore in-year top-ups to budgets this year and so typically overstate the increases in spending next year. After adjusting for this, relative winners include the Education and Skills portfolio (up 5.7% in real terms), the Transport, Net Zero and Just Transition portfolio (up 4.8% in real terms) and the Constitution, External Affairs and Culture portfolio (up 2.1% in real terms). Relative losers include the Social Justice portfolio (down 10.2% in real terms), Wellbeing Economy, Fair Work and Energy (down 5.0% in real terms) and Rural Affairs, Land Reform and Islands (down 0.2% in real terms). 

8.  According to the figures reported in the Budget, funding for the NHS Recovery, Health and Social Care portfolio is, perhaps surprisingly, set to increase by less than average (1.3% in real terms). This figure is, though, affected by classification changes that mean some research and development funding previously classified as resource funding is now classified as capital funding instead. Adjusting for this, on a Budget-to-Budget basis the real-terms rise in funding in 2024–25 is set to be around twice as large (2.6%). However, the NHS Recovery, Health and Social Care budget received significant top-ups in the 2023–24 Spring Budget Revision, totalling £605 million. When accounting for these, even adjusting for the classification changes, health spending is set to fall by 0.7% in real terms between this year and next. 

9. The Budget figures suggest councils’ day-to-day funding will increase by 7.9% in cash terms (6.2% in real terms) in 2024–25. This gives a seriously misleading picture. It ignores not only sizeable in-year top-ups to councils’ funding this year (£310 million), but also the fact that councils could use some of their capital funding (£121 million) for day-to-day spending this year, but that funding is being withdrawn next year, as well as the fact that councils need to fund a series of ‘new burdens’ from their 2024–25 budgets. After accounting for these factors, and the requirement for councils to freeze council tax in order to receive their full grant funding, we estimate that the funding available to councils will increase by just 3.5% in cash terms (1.8% in real terms) next year.