‘Difficult choices’ ahead for next Scottish Government to balance books – expert

The winners of next May’s Holyrood election will face “really difficult choices” balancing the budget, experts have warned – with Scotland facing a near £5 billion financial black hole by the end of the decade.

The Scottish Government has already revealed that as its stands, day to day spending commitments could be £2.6 billion more than the amount of funding it has available by 2030, with capital spending commitments set to exceed funding by £2.1 billion.

Professor Graeme Roy, chair of the Scottish Fiscal Commission (SFC), said on Tuesday that closing this gap would “require all parties in this Parliament and the next to work together to address the fiscal challenges”.

The economic expert also stressed that “any debate around new spending plans, changes to social security policy or tax changes needs to consider the broader public finances”.

His comments came as a new report from experts at the SFC set out how the devolved administration is “facing a tight fiscal settlement and growing pressures on its budget in the short, medium, and long term”.

That report also details how the government elected next May could lose hundreds of millions of pounds from its first budget as a result of negative income tax reconciliations.

These income tax reconciliations see the Scottish Government’s block grant adjusted to reflect the amount of tax raised by the devolved government in comparison to forecasts.

While it is expected that this will result in an additional £406 million for Holyrood in the 2026-27 Scottish budget – which is due to be announced in December – the SFC said that the following year the situation would be different.

But for 2027-28 it is currently expected the Scottish Government will lose £851 million from its budget – with this total exceeding the amount ministers are permitted to borrow under the fiscal framework.

SFC chair Professor Graeme Roy said: “It will be a concern for whoever wins the election in May, that there could be quite a big reconciliation, quite a big hit to the budget, that they need to find in the first budget that they set out.”

And he stated: “Whoever wins the election in May is going to face some really difficult choices about balancing the books.

“They might have different policy priorities, aims and objectives that they want to try to achieve, but they are going to do that inheriting a fiscal position that is seeing funding lagging behind the spending commitments that they will inherit.

“So they are going to have to do a really difficult balancing act to essentially ensure the public finances remain sustainable in terms of the government being able to balance its annual budget.”

Prof Roy said that Scottish Government’s spending review, due to be published with the draft budget in December, would be a “really important point” where the current government “will need to be really   frank in setting out how these gaps are going to be closed”.

Ministers have already set out plans to reduce the size of Scotland’s public sector workforce by 0.5% a year for the next five years to help curb spending – with Prof Roy indicating this could see some 12,000 jobs cut.

But that would come against a backdrop where the number of people employed in the public sector north of the border has grown over recent years, with Prof Roy attributing this in part to “continued growth” in NHS staffing, with more people also being taken on as the Scottish Government has gained new powers over social security.

So he said that while a reduction of 12,000 jobs might sound “relatively small in the overall context of a very large public sector in Scotland”, the expert said this would be “quite a departure of trend” from recent years.

The Scottish Government hopes reducing its headcount could save £100 million in 2026-27, with this total rising to £700 million by 2029-30.

But with more than half of the Scottish budget going on public sector pay, Prof Roy warned of the impact that wage hikes above the level set out in the public sector pay policy could have.

Current policy limits pay rises in the public sector to 3% for this current year and a total of 9% over the three years from 2025-26 to 2027-28 – but Prof Roy noted: “All of the big pay awards have come in above that.

“The budget was set on a pay policy of 3% so that means the government are essentially going to have to find within their existing envelope savings from non pay, or in staffing numbers, in order to pay for these pay commitments.

“It was a real challenge for the government last year, balancing the books, because pay awards were coming in substantially above the pay policy. We have seen that again this year, and that is a general pressure that is going to exist on the government budget.

“The more commitments you make ahead of your pay policy, the more savings you are going to have elsewhere and that is one of the contributors to that growing funding gap you see emerging.”