The Scottish Government has tough spending decisions ahead amid fiscal update

Today saw the publication of the Scottish Fiscal Commission’s Fiscal Update – and a lot has changed since its last report in January.

Since then, we’ve watched the Iran war unfold and the problems this led to, with the closure of the Strait of Hormuz. This summer has seen drought blight England and Wales, with wildfires affecting the north of Scotland. And Britain now has a new Prime Minister – our seventh in ten years – who is trying hard to prove he’s different from his predecessor, especially when it comes to defence spending. None of this bodes well for Scotland’s economic outlook.

There are tough choices ahead for the Scottish Government. Today’s report notes that little new funding will be expected for the Scottish Government in 2027/28 – so the government may have to instead carry over additional funding from this financial year via the Barnett consequentials, after the UK government upped spending on devolved areas like education (for example, on special educational needs and disability schooling reforms).

And it seems likely that the Scottish Government will have less money available for spending on public services. The report notes that the Scottish Budget for 2027/28 will have £720m less to play with – this is to account for differences between the forecast and actual amount of money raised via income tax in previous financial years. While the Scottish Government can borrow to try and lessen the impact of this cash drop-off, the Scottish Fiscal Commission expects it to max out its borrowing capacity – meaning cash piles for public services are likely to suffer.

Might cuts elsewhere offset the pessimistic predictions? Possibly, but not as much as the Scottish Government might have hoped. The report notes little sign of progress by the Scottish Government in cutting down the size of the civil service. In fact, it actually grew in 2025/26 – meaning larger-than-planned redundancies will be required to meet Scottish government targets.

NHS health boards are unlikely to be the saving grace they were planned to be: while just under half of the £563m worth of savings was expected to come from NHS health boards, analysis by Audit Scotland revealed that just 15% of health boards were on track with these plans.

This comes amidst a myriad of disappointing health stories from across Scotland. Audit Scotland warned at the end of last year that the NHS in Scotland remains financially unsustainable, after seven health boards required government loans in 2024. In the north-east of Scotland, all paediatric surgery has been stopped at Dr Gray’s Hospital in Elgin after quality and safety concerns were raised. In Glasgow, a scientist involved in the construction of the flagship Queen Elizabeth University Hospital claimed the safety concerns he had raised over a 15-year period had been continuously ignored. NHS Greater Glasgow and Clyde said it was reviewing the evidence and that safety remained its ‘utmost’ concern.

Some days ago, senior Scottish businessman Sir Ewan Brown criticised Scotland’s NHS as being a ‘complex behemoth’ that oversees £20bn of public money without sufficient scrutiny. Indeed, the question of how to both improve the quality of Scotland’s health service and ensure it is economically viable remains pressing.

And of course there is the elephant in the room of public sector pay awards. Today’s Fiscal Update notes that in practice, pay rises are likely to be higher than what has been planned for, given the rise in inflation. A sliver of a silver lining exists in that increased workforce costs may be offset by changes made to the public sector pension scheme, resulting in lower employer pensions contributions – and, therefore, more savings.

Responding to today’s update, public finance minister Hannah Mary Goodlad noted the ‘challenging financial environment’ faced by the Scottish Government.

She said: “We will continue to take a responsible approach to managing the public finances, prioritising investment in frontline services. Through progressive taxation and careful stewardship of the public finances, we are protecting those who are most vulnerable to these pressures.’

She added: “These are deliberate choices, but we are equally clear that they do not come at the expense of ensuring that public finances remain sustainable. The £1.5bn of savings committed through the Scottish Spending Review will be achieved through workforce reform, productivity improvements and changes to how services are delivered.”

An update on the Scottish Government’s plans will be set out in its Autumn Budget Revision.

Ultimately, it’ll be hard to predict exactly how the worsening economic situation will impact the Scottish Budget until new Prime Minister Andy Burnham brings forward his Autumn Budget this October. It’s not quite clear yet how this will shape up: he has so far promised to stick with the government’s fiscal rules and has ruled out tax hikes – but if he wants his premiership to be about delivery, the cash will have to come from somewhere. What sacrifices this will entail for Scotland is, as of yet, unclear.