This blog is part of a series of publications supporting scrutiny of the Scottish Budget 2025-26. These have considered themes from Committees’ pre-budget scrutiny; capital investment and the transition to net zero; and Scottish income tax.
Tomorrow, the Scottish Government will publish, for parliamentary scrutiny, its initial spending and tax proposals for next year (2025-26).
This blog considers some areas to look out for.
What is the size of the spending envelope?
As avid SPICe Spotlight readers will be aware, the recent UK Budget improved the Scottish fiscal position this year and next. This added £1.5 billion to the resources available for 2024-25, which is baselined into next year’s Budget and supplemented by an additional £1.9 billion in 2025-26 (together giving the £3.4 billion frequently mentioned in dispatches).
However, this is only one part of the budget story!
The Scottish Government has other levers which it can use to change the spending picture for next year. It can borrow for capital (infrastructure) spend (within limits), and use tax powers to boost available resources (or reduce spend should it wish to cut taxes). It can also allocate monies to next year’s Budget from emerging underspends being placed into the Scotland Reserve. The Scottish Government will also have a welcome positive reconciliation of £490.1 million to allocate – from final outturn reconciliations from income tax, other fully devolved taxes and social security spending.
The overall size of the spending envelope set out will be determined by the forecasts produced by the Scottish Fiscal Commission (SFC). SFC judgements on tax revenues arising from proposed government policy will be key to determining the size of the budgetary envelope available for allocation. Additionally, SFC judgements on demand-led social security spending will determine how much is available for other public services that people depend on like local government, health, education and transport.
What tax levers might be pulled, and how?
The main tax policy lever for the Scottish Government in revenue terms is non-savings non-dividend income tax. This lever has been pulled by the Scottish Government over a number of years with new bands, threshold freezes and increased rates in income tax all designed to generate additional revenues to boost public spending. The result has been that Scottish income taxpayers earning over £28,850 per annum pay more income tax than in the rest of the UK. Will we see further tax squeezes on middle to higher earners?
It will also be interesting to watch what happens with local taxes. Last year’s Budget contained compensatory local authority funding for a council tax freeze. Will that policy be repeated and at what price? Media coverage suggests that this policy will not be renewed in 2025-26, allowing local authorities to set their own levels of council tax. The Convention of Scottish Local Authorities (COSLA) has been clear that it does not wish council tax to be frozen again, arguing that increases are required to “protect vital services”.
Another local tax is non-domestic rates. The UK Budget included provision for business rate relief of 40% for Retail, Hospitality and Leisure (RHL) businesses in England next year, following a 75% relief in the current year. This UK government policy (for England) has resulted in Barnett consequentials for the Scottish budget in 2025-26 of £147 million.
The Scottish Government did not replicate the rates relief policy of England this year, but has been under pressure to pass on similar reliefs to south of the border next year. Work by the Fraser of Allander Institute (FAI) suggests that providing equivalent relief in Scotland will be more expensive, estimating it would cost roughly £220 million to replicate this English policy, compared with the Barnett consequentials received of £147 million. The UK Government measures form part of a longer-term plan to permanently lower tax rates for RHL properties with rateable values under £500,000 from 2026-27. RHL businesses will be watching closely to see whether the Scottish Government provides any similar reliefs, whether temporary or longer-term.
The Scottish Government has also promised that a tax strategy document will be published alongside the Budget, so it will be interesting to see what this says about plans for taxation over the longer-term.
Another UK Government tax policy we haven’t heard the last of surrounds the Chancellor’s decision to increase Employer National Insurance contributions (NICs) in 2025-26 to 15% from the current rate of 13.8%, and decrease the earnings threshold above which employer NICs are paid to £5,000 per year (down from £9,100 at present). At the time of its October Budget, the UK Government noted compensation for the higher costs for public sector employers resulting from this policy change would come to the devolved nations. It has been reported that the figure coming for compensation in this area will be around £300 million, substantially lower than the £550 million figure the Scottish Government estimates will be required to cover Scottish public sector costs.
Expect an ongoing stooshie on Employer NICs!
How will the Budget be allocated?
As usual the Budget will be a statement of government priorities and importantly (but more subtly) what is less of a priority. Will health be protected from inflation as it typically has been throughout the devolution years? What will the Local Government settlement look like and how will COSLA and the wider Parliament respond in what is always a politically contentious area? What will Health and Local Government allocations mean for other parts of the Budget?
We will also be watching for consistency between the stated four priorities of the Scottish Government (eradicating child poverty, growing the economy, improving our public services and protecting the planet), and what has actually been allocated. Is there a consistency or a tension between policy goals and spending allocations? Will there be any clear connection between the spending plans and the proposed National Outcomes?
One policy revealed in advance of tomorrow’s budget is the decision to have a more generous Scottish winter fuel payment equivalent (the Pension Age Winter Heating Payment) in place in time for next winter. We await details of cost projections from the Scottish Fiscal Commission, but the UK government block grant addition to Scotland’s budget will reflect the Chancellor’s decision to means test the payment in England, and so will not fully cover the costs of the proposed Scottish equivalent. The Scottish Government will therefore need to find the money to fund this more generous version of the benefit from its own resources, meaning less money available for other parts of the Budget.
Assumptions on public sector pay will be another area to watch. Last year’s Budget was silent on this, with Parliament only being notified well after the Budget had passed of what the internal pay increase assumptions had been (3%). This proved to be an inadequate assumption given the requirement for an emergency budget statement (for the 3rd year in row) in September to fund public sector pay deals and ward off industrial action. The recent Finance and Public Administration Committee pre-Budget report concluded:
“With over half the resource budget now being spent on public sector pay, the Committee strongly urges the Scottish Government to produce a Pay Policy each year, setting out realistic pay growth assumptions. This should wherever possible be published alongside the Scottish Budget to allow scrutiny of how these assumptions might impact on other areas of the Budget, and to inform the SFC’s December Forecasts.”
There has been much discussion recently around public sector reform, following a recent Audit Scotland report. Audit Scotland stated how important reform is to fiscal sustainability, while noting that “there is no evidence of large-scale change on the ground.” This is an area the Finance and Public Administration Committee has been interested in, and will no doubt be looking for evidence in the Budget and accompanying documents that will assuage its concern “about the Scottish Government’s lack of strategic approach to managing Scotland’s public finances.”
The politics of the Budget: Deal or no deal?
Unlike previous budgets debated during this parliamentary session, the 2025-26 budget will be debated with no Government working majority. This means that the Scottish Government needs to reach an agreement with another political party to get its Budget and tax plans approved.
It may well be negotiating brinkmanship, but public pronouncements on party demands point to difficulties ahead. Two likely bed fellows for the Government are the Scottish Liberal Democrats and the Scottish Green Party. Both have focused on the issue of “independence spend” as being the deal breaker in any negotiation – the Liberal Democrats saying they will not support a Budget that includes independence spending, and Greens saying they will only support a Budget that includes independence spending.
This is despite the fact that nobody really knows how much is spent on this Budget line. Indeed, there was no Budget line that included any reference to independence planning in the 2024-25 Budget. One estimate puts the spend on independence in the Scottish budget at £3.5 million since 2021 (representing less than 0.002% of the budgeted spend for the same period).
Parliamentary, as well as Budget, numbers will be important in the coming weeks.
What’s the timetable for parliamentary scrutiny?
As always, publication of the Budget fires the starting gun on another wave of parliamentary budget scrutiny before and after Christmas.
Bilateral meetings between Scottish Ministers and non-governing political parties have been ongoing for some weeks now. Committees will now consider how the Scottish Government has responded to their pre-budget reports, before the debates in the Chamber and votes on the Budget Bill and income tax rate resolution in the new year (late January/February).
In terms of SPICe work on the Budget, we broadly will aim to publish:
- a blog covering key issues in the Budget on 4 or 5 December
- top level infographics and detailed budget spreadsheets on 5 December
- a detailed briefing on the Budget on 6 or 9 December
- potential blogs with further analysis on key themes emerging from the Budget
- a detailed briefing on the local government settlement once allocations to individual local authorities are published.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit (FSU)