Funding for Government departments to drop 8% by 2026, says forecaster

Funding available for Scottish Government departments other than health and social security is forecast to fall by 8% in real terms by 2026.

The Scottish Fiscal Commission (SFC), an independent fiscal institution, has published its latest forecast alongside the Scottish Government’s resource spending review.

The SFC said the recent rise in inflation had a “significant effect” on its forecasts.

War in Ukraine, rising energy prices and supply chain disruptions have led to a “challenging economic outlook”, it said.

The SFC said social security will make up a growing proportion of Scottish Government funding, rising from 10% this year to 14% in 2026-27.

Its analysis said this would put pressure on other areas of Government spending, particularly in the early years of the five-year period.

Meanwhile, fellow think tank, the Institute for Fiscal Studies (IFS), said some areas such as enterprise, tourism and trade promotion would see a 16% reduction in real terms.

The UK and Scottish Governments have taken different approaches to welfare spending, including the introduction of new Scottish payments.

By 2026, the Scottish Government is expected to spend more than £1.3 billion above what it receives from the UK Government on social security.

SFC chair Dame Susan Rice said: “The difficulties the Scottish Government faces in managing its budget are illustrated by the 8% fall in funding available by 2025-26 for areas other than health and social security after adjusting for inflation.

“Scotland continues to be affected by challenging economic circumstances and uncertainty.

“Rising inflation means earnings aren’t keeping pace with the cost of living.

“We expect inflation pressures to last into the middle of next year, with a return to positive real earnings growth in 2023-24.”

The SFC’s forecast also said the capital budget is forecast to fall over the next four years, both before and after inflation.

Scottish GDP growth is expected to slow to 1.1% in 2023/24, down a single percentage point from the current year.

However, the SFC said Scotland was not forecast to enter a recession.

Average household earnings are not expected to keep up with inflation, leading to “significant implications” for those on lower incomes.

IFS associate director David Phillips said: “On the plans set out today, the axe is set to fall on a wide range of public service areas.

“Budgets for local government, the police, justice, universities, rural affairs are due to fall by around 8% in real-terms over the next four years.

“Spending on enterprise, tourism and trade promotion is set to fall even further – by 16% in real terms, over the same period.”

He added: “Underlying these difficult decisions are UK Government funding plans that look less generous than when they were set last autumn as a result of higher inflation.

“But big increases in social security spending and a relatively poor income tax performance also make the challenges more difficult, and that’s despite the Scottish Government implicitly assuming a further rise in income tax relative to the rest of the UK.”

The Fraser of Allander Institute welcomed the review, with director Mairi Spowage saying the Government deserved “some credit” for laying out its plans “despite significant uncertainty in its outlook”.

“It is hard to understand from what has been published today how the Government will meet its transformational objectives on social care, child poverty and climate change, to name a few within this tight funding environment,” she added.

“Particularly challenging is the outlook for public sector pay policy – with the Government assuming they will be able to keep the public sector pay bill flat in cash terms over the next few years, by reducing the size of the public sector back to pre-Covid levels by 2026-27.

“It seems likely that there will be huge pressure to revisit the current public sector pay policy as a result of surging inflation.”