This is an initial blog analysis of the 2025-26 Budget. More detailed SPICe briefings and additional blogs will follow in due course.
As this is an extended blogpost, we’ve added a contents popout here to make navigation easier.
This afternoon the Cabinet Secretary for Finance, Shona Robison MSP, presented the Scottish Government’s tax and spending proposals for 2025-26 to Parliament. Much of the rhetoric in the lead-up was about how this would be a Budget which would “put the people of Scotland first”, “deliver on people’s priorities”, “improve public services” and “grow the economy”. However, any Budget requires trade-offs between priorities and, by implication, lesser priorities, winners and losers – it is impossible to please all of the people all of the time.
This blog is a first look at the choices the Scottish Government has made in allocating its finite budget.
But first, we consider the all important Scottish Fiscal Commission (SFC) forecasts. SFC judgements are key to determining the budgetary envelope – the amounts that will be raised from Scottish Government tax policy and the amounts of money required to fulfill Scottish Government social security policy. The SFC also set out their forecasts for how the economy will perform over a five-year time horizon.
Scottish Fiscal Commission forecasts
The SFC note that the UK Budget has resulted in large increases in funding, particularly in capital (infrastructure) funding which is expected to grow by 12% next year. However, they note that on the resource (or day-to-day spending) side, social security is taking up a growing share of the Budget, meaning less for other areas in 2025-26 compared to this year.
This is the clear Scottish Government choice in this Budget to support low earners, pensioners and tackle child poverty, but it has the effect of squeezing other areas. The SFC note that budget constraint is further compounded by “growth in staff costs across the devolved public sector.”
“Successive pay deals and Scottish Government policy choices have resulted in a larger public sector in Scotland with higher average wages. The Scottish Government has set its pay policy for the next three years to manage these rising pay costs. The changes to employer National Insurance Contributions add to the pressure as the compensation from the UK Government is unlikely to fully cover the cost. This all points to increased pressure from staff costs which the Scottish Government will need to manage.”
The SFC forecasts that economic growth will be boosted (relative to its previous forecast) in the short term by increases in government spending which will see GDP growth of 1.2% this year (+0.4 percentage points on the previous forecast), followed by 1.6% next year (+0.3 percentage points on previous forecast). Growth of 1.5% is forecast in 2026-27.
The SFC is forecasting earnings growth to be higher in Scotland in 2025-26 (3.7%) than the OBR is forecasting for the UK (3.0%), due to Scotland’s relatively tighter labour market. After a period of high inflation, nominal earnings growth is falling back to more normal levels, and is expected to settle around its long term average of 3% from 2026-27.
The baseline numbers and comparability
The baseline budget this year (ie the Budget position for 2024-25) is based on the position set out in the Autumn Budget Revision 2024-25 published in October this year. This is a change from the usual Budget to Budget position and provides a more up to date comparison of the current in-year situation. This follows a request from the Finance and Public Administration Committee following the significant in-year movements we have seen in recent years.
While well-meaning to reflect the emergency budget review, this has had the effect of distorting some budget lines as portfolio budgets for 2025-26 have not been adjusted to reflect certain in-year transfers that are known to take place each year – for example there is an annual transfer from Health to Local Government for social care. This has had the effect of making the increase in Health artificially high and the change in Local Government artificially low.
As such, we have decided to not publish our usual portfolio change infographic, as some comparisons could be misleading without consideration of specific factors for some portfolio areas.
Tax policy
Income tax
As mentioned in our preview blog, the Scottish Government has used its income tax lever to generate additional resources from Scottish income taxpayers in recent years. But the Cabinet Secretary confirmed to Parliament that the Budget does not introduce any new bands for 2025-26 and committed the Government to no increase in the rates of Scottish Income tax for the remainder of this Parliament.
On the thresholds at which rates and bands are set, the Budget proposes to increase the thresholds for the Basic and Intermediate thresholds by 3.5% in 2025-26, and freeze the Higher, Advanced and Top thresholds.
The effects of this for individual taxpayers are set out in the figure below. Compared to the rest of the UK, the Scottish Government’s income tax proposals mean that all taxpayers earning below £30,300 will pay less income tax in Scotland than they would if they lived elsewhere in the UK. However, the differences are small for this group of taxpayers – only £28 per year for most in this group. For those earning above this amount, the gap between what they pay in Scotland and what they would pay elsewhere in the UK widens rapidly as earnings increase. Those earning £50,000 will pay around £1,500 more in Scotland than they would elsewhere in the UK, while someone earning £150,000 will pay almost £6,000 more over the year.
Note: a previous version of this blog post stated that Scottish taxpayers had to earn at least £30,400 instead of £30,300 in order to be due more income tax in Scotland than in the rest of the UK. The exact threshold at which a taxpayer in Scotland pays more than under UK income rules is £30,318.
Net income tax position
The SFC forecast strong growth in income tax revenues, driven by higher than previously expected nominal earnings growth. However, the equivalent OBR forecast for the UK as a whole has increased even further. This means that the 2025-26 income tax net position, which was forecast to be £1,749 million this time last year, is now forecast to be £838 million. This is the difference between Scottish income tax revenues and the income tax Block Grant Adjustment (BGA). The income tax BGA is an estimate of what would have been raised had income tax policy and per capita earnings growth mirrored that of the UK since income tax was partially devolved.
This means that overall, the Scottish Budget is better off by £838 million because of the partial devolution of income tax. However, the SFC also point out that Scottish income taxpayers pay £1,676 million more in income tax than in the rest of the UK. So, in return for paying £1,676 million more in income tax, the Scottish Budget is only benefitting by £838 million. They describe this as an “economic performance gap”. It is also worth cautioning that the income tax net position is highly sensitive to small changes in OBR and SFC forecasts, as shown by the large fall in the net position forecasts in this year’s forecast relative to last year.
This also matters for future budgets. The size of the budget is partly based on forecasted tax revenues in Scotland and the rest of the UK. A reconciliation is then applied to future budgets once actual tax revenues are known. When the 2024-25 Budget was set, the income tax net position was forecast to be £1,412 million. Since then, the OBR’s projections of 2024-25 income tax revenues for the UK have increased by more than the SFC’s equivalent for Scotland, which suggests the eventual income tax net position for 2024-25 will be smaller than was forecasted when the Budget was set. If borne out, the SFC now projects a negative reconciliation of £701 million will be applied to (ie. deducted from) the 2027-28 Scottish Budget. The Scottish Government does have limited borrowing powers to smooth out the effects of reconciliations – but £701 million exceeds the annual borrowing limit for forecast error.
Non-domestic rates
Over the past two years the Scottish Government has been under pressure to replicate the UK government’s 75% business rates relief for Retail, Hospitality and Leisure (RHL) properties. The Chancellor announced a change of tactic in the Autumn Budget 2024, with a 40% relief for RHL properties in England and Wales. This was billed as a transitional approach, with the intention being to permanently lower the business rates multipliers for RHL properties from 2026 onwards.
The Scottish Budget 2025-26 sees the 100% relief for hospitality premises on islands introduced last year maintained. In addition, the Cabinet Secretary announced that a new 40% relief will be available for “the 92% of hospitality premises liable for the Basic Property Rate, capped at £110,000 per business”, as well as for Grassroots Music Venues with a capacity below 1,500. All in, the Scottish Fiscal Commission estimate that the new 40% relief will cost the Scottish Government £22 million in 2025-26, in addition to the £5 million cost of extending the Islands relief for a further year.
The news that relief will not be extended to retail businesses has not been well received by stakeholders, with a spokesperson the Federation of Small Businesses calling it “a bitter pill to swallow”. Given that shops make up roughly a fifth of properties on the Valuation Roll it’s a large demographic to alienate. However, replicating the UK government approach would come at a significant cost, an estimated £220 million according to the Fraser of Allander Institute.
During the Budget debate, the Cabinet Secretary argued that going further than the proposed measures “would not be sustainable” and set out that doing so:
“would cost more than £350 million, and we would not get that money from the UK Government. We got only £145 million this year in consequentials, and there will be no consequentials next year, because the UK Government is moving to a different business tax rate system that cannot be replicated here.”
Allocations
Health – up…but by how much?
On the face of it, the health and social care budget is up by £2 billion in cash terms equivalent to a 7.7% real terms increase on 2024-25. Most of this will benefit the NHS Board budgets, but there is also a planned increase of £184 million to the health capital budget. Much of the increase for health and social care will reflect the commitment to pass on health-related Barnett consequentials received as a result of the UK October Budget. Increased planned UK government spending on health and social care resulted in an additional £1.7 billion for Scotland in 2025-26.
However, the change in the presentation of the budget numbers this year has particular implications for some budget lines, including health. The 2024-25 baseline is now presented after Autumn Budget Revisions (ABR). For the health and social care portfolio, there are always some substantial transfers to other portfolios made at the time of the ABR and this year there were some substantial additions too. If similar transfers to other portfolios take place next year, as might be expected, then the increase to the health and social care budget looks less significant (closer to 3% in real terms). This serves to highlight that the baseline position has an important bearing on the reported change in a given budget line and a number of different baseline positions could be used. Similar challenges affect the local government budget debate.
Local Government increases but will it be enough for COSLA…and the other political parties?
Next year’s local government allocation will be over £15 billion for the first time ever, representing a 4.7% real terms increase when compared to the 2024-25 Budget. This may seem like a significant increase but COSLA has already set out its stall arguing that local government needs a total allocation of £15.4 billion next year. As such, local authorities are likely to say that the funding announced today is not enough for them to address the various challenges they currently face.
Perhaps optimistically, the Cabinet Secretary is of the view that “with record funding, there is no reason for big increases in council tax next year”. But that’s now a decision for councils themselves to make. A recent survey conducted by the Local Government Information Unit found that around a fifth of local authorities are considering increasing council tax by at least 10% next year. With the Scottish Government having secured freezes and caps for much of the last 17 years, increases of this magnitude could come as quite a shock to many households, especially as levels of satisfaction with council services are not particularly high.
Social Security
As mentioned above, the Scottish Government’s commitment to a range of social security benefits, along with new commitments made in this Budget have clear implications for overall spend in this area. Social security spending is well over the block grant allocation added to the Budget from equivalent UK government policies.
The Scottish Child Payment (which has no UK equivalent) is an example of where there are ongoing commitments to spending that will not be covered by any block grant adjustment. Others coming down the line are the commitment to partially compensate pensioners who would no longer qualify for the Winter Fuel Payment under the UK government’s plans and the intention to mitigate the UK government’s two child cap for Universal Credit payments.
Capital
The capital budget has increased from £6.4 billion in 2024-25 to £7.3 billion in 2025-26, which is a 12% increase in real terms. Much of this change is driven by policy decisions in the UK Budget in October, with the settlement from the UK Government increasing from £5.7 billion to £6.4 billion. In addition, the Scottish Government have utilised £330 million from Scotwind revenue, and the maximum amount of borrowing under the fiscal framework (£472 million, as the limit has increased in line with the GDP deflator since last year). This would increase the stock of capital borrowing to 87% of the cumulative limit of £3.1 billion, an increase of 8 percentage points from 2024-25, and suggests that the Scottish Government will need to slow the amount of borrowing in future years.
The SFC have forecast that total capital resources available to the Scottish Government will dip slightly in 2026-27 and largely remain flat throughout the forecast period – however, this picture could well change after the UK government complete their spending review in 2025.
In 2024-25, 42% of capital spending (£2.7 billion) was categorised as positive for Scotland’s climate targets. In 2025-26, the proportion of spend categorised as positive has increased slightly to 44%, and as it is a larger capital budget this amounts to just under £3 billion of spending.
Housing cut from this year reversed
The Cabinet Secretary announced a budget of £768 million for investment in affordable housing, an increase (in real terms) of 26% from the current year. Pressure had been mounting on the Scottish Government to increase resources for the budget given the declaration of the national housing emergency in June and the cut in the 2024-25 budget. However, the budget is still lower (by 3%) compared to 2023-24.
Public sector pay – has the Scottish Government learnt the lessons from 2024-25?
As promised by the Cabinet Secretary for Finance and Local Government during a session with the Finance and Public Administration Committee earlier this autumn, the Scottish Government published a Public Sector Pay Policy alongside the budget for the first time since the 2021-22 Budget. The policy revises the multi-year Pay Policy issued in May 2024, as well as recognising the fiscal context following the UK Budget and updated inflation forecasts. This is a welcome change on the silence in recent years given that spending on public sector pay now accounts for over half of the Scottish resource Budget.
The key features presented include a multiyear pay envelope of 9% over 2025-26, 2026-27 and 2027-28 and flexibility for employers to configure three year proposals within the 9% pay envelope with a maximum 3% pay uplift for 2025-26. The Policy is also quick to highlight these metrics are well above the predicted rate of inflation which sits at 7% across the three-year period.
Although the Scottish Government has published a pay policy alongside its budget for the first time in four years, it did not provide the SFC with information on workforce. This leads to the SFC highlighting further fiscal risks around public sector pay coming from pay pressures or the size and composition of the workforce being different than budgeted for.
The Budget contained no provision for meeting public sector employers NIC increases announced by the Chancellor in her October budget. While the Scottish and UK governments are still at odds over the amount the Scottish budget will be compensated by, it is nevertheless a risk to the fiscal position for which no provision has been made in this Budget.
A strategy for tax?
The Scottish Government published a Tax Strategy alongside the Budget, intended to set out the steps that will underpin the Scottish Government’s approach to developing tax policy. In terms of firm commitments, these are limited and – given where we are in the political cycle, effectively only cover commitments for this budget and the next. In respect of income tax, the Scottish Government is committing to:
- not introducing any new bands or rates
- ensuring that more than half of Scottish taxpayers will pay less income tax than they would in the rest of the UK – currently this is achieved, but these individuals pay only £28 less per year at most than they would in the rest of the UK, so it is not a major difference
- uprating the starter and basic rate bands by at least inflation
- freezing the higher, advanced and top rate thresholds.
There are plans to introduce a Scottish Aggregates Tax by 1 April 2026, and to resolve the subsidy control issues that are standing in the way of implementing a Scottish Air Departure Tax. A Building Safety Levy is also planned.
Beyond the specific commitments, there is lots of talk of “exploring”, “considering” and “engaging” on a range of taxes, including council tax and non-domestic rates. There is a commitment to reporting on progress in early 2026.
The main Budget document refers to plans for a Cruise Ship Levy and Carbon Land Tax, but these are not referred to in the Tax Strategy document.
Public service reform
The need for public service reform has been highlighted by many stakeholders for many years, but progress is still hard to see. Audit Scotland has noted that “there is no evidence of large-scale change on the ground” and the Parliament’s Finance and Public Administration Committee has expressed some frustration around the lack of any clear action. The Budget document states that:
“We must also be efficient and effective in how we deliver public services. We have set out a 10-year programme of [public sector reform] PSR to Parliament, with a strong focus on the data, levers and workforce that will drive efficiency. To enable this work, we will deliver an Invest to Save fund in 2025‑26, backed by up to £30 million of funding recognising the need to catalyse efficiency, effectiveness and productivity projects as part of the PSR programme.”
It is hard to see how £30 million will really shift the dial when the Budget also notes that health and social care reform is a key element of the approach and showing “signs of strain” with “significant challenges” to navigate.
What next?
Parliament now moves to detailed scrutiny of Scottish Government plans, beginning next week in Committees.
As highlighted in a previous blog, this Budget comes in a minority government context, unlike previous Scottish budgets this session. Today, therefore, is the opening move in a process which will likely require amendments when Parliament votes on this early next year.
Opposition political parties will now need to weigh up whether they wish to support or change these plans ahead of the crucial plenary votes next year.
Financial Scrutiny Unit, SPICe