Next week, the Budget Bill for 2025-26 looks certain to pass. This blog considers this year’s Budget deal, and what comes next.
When the Scottish Government published its initial tax and spend proposals for 2025-26 back in December last year, much of the talk was around whether the plans could command the support of Parliament.
Any suspense over this issue was dampened early in the new year when Anas Sarwar announced that Scottish Labour would not vote against the Budget. Nevertheless, talks continued between parties resulting in the announcement of a deal between the Scottish Government and the Green and Liberal Democrats in late January.
What was the deal?
In a letter to the Finance and Public Administration Committee on 28 January, the Cabinet Secretary provided detail of the arrangements with the Liberal Democrats and Green Party. The deal with the Scottish Liberal Democrats totals £7.7 million and includes:
- Increase Drugs and Neonatal Service Investment. +£2.5 million
- Strengthen support for Hospices. Increase the funding from £4 million to £5 million. +£1 million
- Invest in targeted support for the College sector. +£3.5 million in creating an Offshore Wind Skills Programme and College Care Skill Programme.
- Support the continuation of Corseford College. + 0.7 million
- Offer flexibility to Orkney Island Council in terms of capital and resource funding.
With the Scottish Greens, the deal totals £9 million and includes:
- Establish a £2 bus fare cap pilot in a regional transport partnership area. +£3 million in 2025-26 (£10 million in total)
- Increase Nature Restoration funding – increase from £23 million to £26 million. +£3 million
- Extend free school meal eligibility in S1-S3 in 8 local authority areas – covering pupils in an urban, rural, semi-urban and island authorities in receipt of Scottish Child Payment. +£3 million
Amendments giving effect to these measures were agreed by the Finance and Public Administration Committee on 18 February when the Budget Bill was considered at Stage 2. The final parliamentary “stage 3” proceedings to formally pass the Budget Bill (authorising devolved spending for 2025-26) will take place in the Chamber next Tuesday afternoon (25 February).
SPICe has kept a close eye on Committee influence of the Budget process and allocations. Although, the Budget agreements (summarised above) between the Parties are a direct consequence of political deals reached behind closed doors, there are echoes of Committee work and influence behind them. For example, the Education, Children and Young People Committee pre-Budget scrutiny letter stated:
“The Committee reiterates its recommendation, made as part of its colleges inquiry, that the Scottish Government and SFC continue to explore how to give colleges as many financial and operational flexibilities as possible to improve their ability to deliver, especially in the current challenging financial climate.”
There were also exchanges in the Net Zero and Climate Change Committee about the possibility of introducing a bus fare cap.
Having said that, the scale of changes agreed to the Budget during this year’s process (at a grand total of £16.7 million) is significantly lower than previous deals struck during periods of minority government.
Budget will pass, but there’s lots still going on
Despite the spending allocations and tax rates and bands being set to be agreed for next year, there are still some areas to be keeping an eye on after next week.
The NIC of time?
With increased employer National Insurance Contributions (NICs) due to commence from this April, the Scottish Government has still not been formally notified by Treasury about how much it will receive in compensation from this UK government policy. Just to recap, in its Autumn Budget of 30 October, the UK Government announced that employers will pay National Insurance Contributions (NICs) at a rate of 15% on employees’ earnings above £5,000 (an increase from the current rate of 13.8% and a decrease in the threshold above which employer NICs are paid from £9,100 at present). This is expected to raise around £24 billion per annum at UK level.
Costs for this policy have not been factored into the 2025-26 Scottish Budget yet. The Scottish Government estimates that this policy will cost directly devolved employers £549 million next year, although the Fraser of Allander Institute estimates a lower figure of £509 million. The Cabinet Secretary informed the Finance and Public Administration Committee on 18 February that the Treasury indicated in “its most recent communication” that a figure of just over £300 million would be provided to the Scottish Government in relation to the additional public sector costs of the policy. The Cabinet Secretary has indicated that Local Government will receive £144 million for delivering this policy (which is 60% of the latest estimated cost).
It is likely funds will be required from other parts of the Budget to deliver this policy across Scotland’s public sector.
Will the Scottish Government need to significantly revisit the Budget in-year again?
In recent years the Budget as passed by the Scottish Parliament has been significantly revisited during the financial year to accommodate increased costs, for example in relation to public sector pay deals. The Scottish Fiscal Commission in its Economic and Fiscal Forecasts of December 2024 noted that the budget had been set based on 3% increases to the public sector pay awards as set out in the Government’s public sector pay policy. The SFC, however, point out that other factors can impact paybill pressures, such as:
“pay progression within pay-bands changes in the structure of grades in the public sector, vacancies and staff turnover which will need to be accommodated by portfolios within their allocations as the Scottish Government has not made provision for increases in the paybill other than the 3 per cent pay award. The size of the workforce is also an important lever to manage the paybill. The Scottish Government has indicated that it will set out further detail on what this means for the public sector in Scotland as part of a Fiscal Sustainability Delivery Plan published alongside the Medium-Term Financial Strategy, noting protection for frontline staffing, such as in the NHS.”
Pay will be one to watch again.
Linked to pay, it appears that the British economy may still have inflationary pressures on the horizon. The latest Bank of England monetary policy report suggests that inflation is likely to reach 3.7% over the first half of this year, before returning to the target rate of 2%. The Scottish Government will be hoping that any further increases in inflation are short lived.
Global economic headwinds may lie ahead
There has also been much coverage of late around the potential for escalating “trade wars” following pronouncements from the new US administration. It remains to be seen how this feeds through to the UK economy and public finances, but there are clearly potential global economic shocks on the horizon, if tariffs and retaliatory tariffs (which tend to be inflationary) become widespread.
Indeed, the Bank of England has stated that inflation has followed and may continue to follow a “bumpy path”.
“inflation is likely to rise to 3.7% over the first half of this year…because of increases in energy prices, and increases in some regulated prices such as water bills.
Inflation is expected to fall back to the 2% target after that. But the economy may not evolve as expected, including because there could be global shocks. For example, global trade tariffs or developments in the Middle East could impact some prices.”
What’s next? Dates for the diary
As budget aficionados know, we’re never far from some more fiscal publications, so a few dates are worth putting in the diary.
26 March will see the Office for Budget Responsibility (OBR) set out its latest economic and fiscal forecasts for the UK, accompanied by a Statement to the Parliament from the Chancellor. This will provide the OBR’s latest judgements on the economic outlook, and crucially, what that means for the public finances and the choices facing the Chancellor as she prepares for her Spending Review publication on 11 June.
From the Scottish Government, we expect the publication of the Medium Term Financial Strategy (MTFS) in late May (date to be confirmed) alongside a new document the Scottish Government is publishing entitled the Fiscal Sustainability Delivery plan (FSDP). It will be interesting to see what this looks like and how it differs from the objectives envisaged by the Budget Process Review Group when it recommended that an MTFS be published annually.
The Cabinet Secretary for Finance informed the Finance and Public Administration Committee on 18 February that, in light of the UK Spending Review expected in June, work on the Scottish Spending Review is underway. However, there is no decision as yet on when that process will conclude, and whether that will be before or after the next Scottish election in May 2026.
Ross Burnside, Senior Researcher, Financial Scrutiny Unit (FSU)