On 25 June, the Scottish Government published a new Medium Term Financial Strategy (MTFS). The MTFS sets out the Scottish Government’s broad financial plans for the next five years. This includes its policies and principles for using financial powers, economic and fiscal forecasts produced by the Scottish Fiscal Commission (SFC), and scenario plans to account for the SFC’s forecasts.
The MTFS is intended to be a key document underpinning the Scottish Budget process. SPICe discussed the intended purpose of the MTFS in a recent blog. Originally set to be published on 29 May, the MTFS was delayed in order to take account of the outcome of the UK Spending Review which was published on 11 June. The SFC has updated its recent Economic and Fiscal Forecast to take account of the UK Government’s spending plans.
Alongside the MTFS, the Scottish Government has published a fiscal sustainability delivery plan which is intended to provide detailed plans to address pressure on the resource budget over the next five years.
This extended blog post provides an overview of these recent publications and highlights key issues for Parliament to consider as part of its pre-budget scrutiny. The contents below are provided to ease navigation.
A first update to the MTFS since May 2023
As noted in a recent blog, there have been several significant changes since the last MTFS was published in May 2023. There has been a change of UK Government and there is a new First Minister in Scotland. The updated fiscal framework has slightly increased the borrowing powers available to the Scottish Parliament. Recent inflation and economic instability have made financial planning more difficult and, in that context, the Scottish Government has implemented emergency budget reviews in 2023 and 2024 to ensure the budget remains balanced.
However, now that the new UK Government has completed its Spending Review, there is greater clarity on the block grant settlement over the next four years.
The Scottish Government’s funding position
Much attention has been focused on the ‘black hole’ identified in the latest MTFS – the difference between anticipated funding and spending plans over the next five years, with the Cabinet Secretary noting that this gap increases to nearly £5 billion by 2029-30.
The Scottish Budget must be balanced, so this difference will have to be addressed by reducing spending compared to what is planned in the MTFS or increasing devolved tax revenues.
Resource (day to day) spending
To forecast resource spending, the MTFS takes the current levels of spend and models anticipated changes through future demand – significantly public sector pay which accounts for more than half of resource spending. Resource spending is forecast to rise from £52.6 billion in 2025-26 to £61.7 billion in 2029-30, but over the same period resource funding is expected to rise to £59.1 billion. This £2.6 billion difference between planned spending and anticipated resource funding is the so-called ‘black hole’.
Resource funding takes account of the anticipated net tax position – this is the difference between the amount of funding subtracted from the block grant to account for devolved taxes, and the amount raised by the devolved taxes. The difference reflects both policy choices and the relative economic performance of Scotland and the UK. In 2025-26 the net tax position is expected to be £1.2 billion, and this is forecast to rise to £2.3 billion by 2029-30. The net tax position is sensitive to the SFC forecasts for devolved tax revenues, and the Office for Budget Responsibility (OBR) forecasts for revenues across the rest of the UK (rUK) from equivalent taxes, and so will be subject to change over the forecast period.
The Scottish Government notes that, compared to the position at the time of the 2025-26 Scottish Budget, the fiscal outlook is initially better (to the tune of £1.2 billion in 2025-26), but then deteriorates and is £1.2 billion lower than previously expected by 2029-30. The improved position for the current financial year is partly due to higher amount of funding carried through the Scotland Reserve (in other words, underspends from the 2024-25 financial year), as well as a larger block grant due to funding for increased employer national insurance contributions, which had not been confirmed at the time of the 2025-26 Scottish Budget. Over the medium term, anticipated funding declines due to a lower block grant as confirmed in the UK Spending Review (£685 million lower by 2029-30), as well as lower Social Security BGAs (£408 million by 2029-30). Finally, the net tax position is revised down by £102 million in 2029-30.
Resource spending plans
The MTFS notes that public sector pay, including local government, accounts for around 55% of resource spending. With some exceptions to reflect pay deals already agreed, the Scottish Government assumes growth in the pay bill of 2.9% in 2026-27 and 2027-28, consistent with the 9% over 3 years multiyear ‘envelope’ set out in the Scottish Government’s latest Public Sector Pay Policy. Thereafter, pay is expected to grow in line with CPI inflation of 2% The central scenario assumes no change in size of workforce. There are also pay deals that are linked to inflation to an extent, which means if inflation runs higher than expected the pay bill may increase.
As a ‘general measure’, the Scottish Government states that a 1% reduction in the public sector workforce would realise £160 million in savings in the first year, and recurring savings of around £300 million in each year thereafter. The MTFS sets out that if the workforce grows by 1% or shrinks by 1% on average over the forecast period, then by 2029-30 the public sector pay bill would be £1.4 billion higher or lower than the forecast.
Health spending has been a consistent priority for the Scottish Government in recent years, and the MTFS forecast suggests that this trend will continue. Health spending is expected to grow by 3.3% per year, which is higher than UK funding associated with healthcare. Because health and social care accounts for almost 40% of the Scottish budget, changes to forecasts can have significant impacts. For instance, if healthcare spending grows by 1% more than expected, the impact would be over £1 billion additional spending by 2029-30.
The costs of delivering social security in Scotland are driven by two factors: trends affecting demand, and policy choices. The Scottish Government notes that the trends affecting demand, including increasing demand for disability payments, increased cost of living, and rises in payment rates due to uprating, are consistent across the UK.
However, there is divergence due to different policy choices in Scotland. This covers both new payments like the Scottish Child Payment, changes to existing UK wide benefits, and the cost of the Scottish Government’s different approach to applications for social security than that of the UK Government. Total ‘additional investment’ reflecting these policy choices in Scotland rises from just over £1 billion in 2025-26 to £1.8 billion in 2029-30. The Scottish Government notes that this is expected to be just over 3% of total resource budget in 2029-30.
The additional cost of social security in Scotland does not reflect only decisions made in Scotland. Changes in UK Government policy can change the level of block grant adjustment, which can increase or reduce the additional costs in Scotland. This is very much a live issue as the UK Government considers its approach to welfare reform, and represents an area of uncertainty in the short term. Notably, the UK Government has also suggested it may change its position on the 2-child limit, a decision which could have financial implications for the Scottish Budget. The UK Autumn Budget later this year should provide some clarity on this, in the short term at least.
Capital spending plans
While both capital and resource spending plans suggest a shortfall or ‘black hole’ of over £2 billion each by 2029-30, this is much more striking in the capital space given the relative size of each budget. The £2.6 billion resource ‘black hole’ is around 4% of planned resource spending in 2029-30. In contrast, the £2.1 billion capital ‘black hole’ is around 23% of total planned capital spending.
The MTFS provides more detail on the proposed capital spending, including categorising spend:
- Continuation of service delivery: This involves regular maintenance spending on assets such as the road and rail networks, and ferries.
- Existing asset renewal and improvement: This relates to work to improve or replace assets, such as HMP Glasgow which is replacing HMP Barlinnie, or costs related to dualling the A9.
- Capitalised research: This is a way of accounting for research costs, and allows for them to be accounted over several years rather than being fully recognised when they are incurred.
- Capital programmes: This includes major programmes such as Affordable Housing, Heat in Buildings and the General Capital Grant for local government.
On capital spending plans, the Scottish Government notes that ‘continuation of service delivery’ accounts for nearly £3 billion each year from 2026-27 onwards, although this reduces slightly from £2.95 billion to £2.74 billion. Another £2 billion relates to ‘existing asset renewal and improvement’. Taken together, the account for around £5 billion each year, rising slightly over the forecast period.
In 2026-27, there is approximately £1.5 billion available for capital programmes after these costs are met – but the MTFS suggests spending plans for this year valued at around £2.6 billion. By 2029-30, the amount available for capital programmes (after covering other costs) declines to around £1.1 billion, but the programme is expected to cost over £3 billion.
The MTFS does not allow us to identify which parts of this spending relate to previous commitments. For example, some of the available capital resources are the UK Government contributions to the City Region Growth deals. These are ring fenced and must be passed on to the deals, along with the Scottish Government’s contribution which is typically matched. The comparison to funding also does not include financial transactions, which have limitations so would not be suitable for all types of capital spending. However, even including these there remains a significant difference between the costs of delivering the Scottish Government’s planned spend, and the expected resources available.
The MTFS assumes that capital borrowing will remain at £300 million per year. This level of annual borrowing is considered to be sustainable by the Scottish Government, and should ensure that there is at least £1.5 billion of capital borrowing headroom remaining for the next Parliamentary term.
What are the main fiscal risks identified in the MTFS?
There are several risks identified by the Scottish Government which could impact spending plans or resources available. Some aspects of spending that the Scottish Government is responsible for are demand led, for example social security. As social security increases as a proportion of total spending, the size of this potential risk increases.
The Scottish Government also highlights demographic change as a potential risk. This can impact on demand for certain services but can also have an impact on Scotland’s labour market which could feed through to the performance of devolved taxes.
Capital budgets have been relatively strained in recent years, and the Scottish Government notes that this has contributed to an increased backlog for asset maintenance. There is a risk that ageing buildings and infrastructure require remediation or replacement work earlier than planned, which could further increase pressure on capital budgets.
The MTFS also discusses contingent liabilities (CLs) – these are potential liabilities which, if they materialise, might expose the Scottish Government to a fiscal risk. Exposure to CLs has increased in recent years, and is expected to continue to do so. There are broadly 2 types of CL – firstly those arising from the ordinary function of government such as funding pension shortfalls which might emerge, or legal claims. Secondly, there are those which arise from policy decisions, for example decommissioning costs associated with offshore wind developments. Scottish Government consolidated accounts set out the gross exposure, which represents the costs the Scottish Government would face if all risks materialised.
Finally, the MTFS also notes the financial risks due to climate change. There are costs to mitigate the impacts we are already seeing, such as the need to be able to respond to severe weather events. There are also the costs associated with making the transition to net zero, which the SFC notes are expected to be proportionally higher in Scotland than rUK (particularly around land use). Given that a significant portion of the Scottish Budget is determined by the block grant, these higher costs present a key financial risk for the Scottish Government.
What does the MTFS tell us about allocations across portfolios?
The MTFS provides some indication of how the Scottish Government intends to prioritise spending across portfolios, although, much like in the 2023 publication the detail is relatively limited. The broad direction of travel is for a continuation of the prioritisation of health and social care and social security spending, which are expected to increase by an average of 5.3% and 6.8% per year respectively. This compares to an overall average growth in resource spending of 4.1% per year for the same period. In contrast, local government (growing by 2.6% per year on average) faces a challenging outlook, with other spending areas growing by just 2% per year on average. As these growth figures are in nominal terms, this suggests there are likely to be real terms cuts required in order to meet spending plans in priority areas.
As a proportion of total resource spending, health and social care increases from 38.4% in 2025-26 to 40.2% in 2029-30, while social security spending rises from 12.9% in 2025-26 to 14.3% in 2029-30. Local government spending declines from 24.4% to 23.0%, while ‘other’ (which includes education, justice and transport) declines from 24.4% of resource spending to 22.5%.
The Scottish Government has said that it will provide further information on the broad spending plans by portfolio in December in the Scottish Spending Review, expected to be released at the same time as the 2026-27 Scottish Budget.
Public sector pay is a significant driver of resource spending
MTFS pay forecasts may offer some indication of Scotland’s fiscal trajectory – currently 55% of resource spending is pay-driven. Health and social care and local government accounted for over 81% of the public sector pay bill in 2024-25, and over 80% of the public sector workforce.
The NHS full time equivalent (FTE) workforce has grown on average by 2.3% annually since 2019, while the local government workforce has grown by 0.9% annually over the same period.
The Scottish Government’s Public Sector Pay Policy (PSPP) sets annual pay rises at 3% for the period 2025-28 based on inflation forecasts. However, since its publication in December 2024, the Office for Budgetary Responsibility and Bank of England have raised their inflation forecasts for 2025-26 from 2% to 3.2%. While the MTFS acknowledges the highly unpredictable inflationary situation, it offers limited detail in addressing its potential impact on resource spending, particularly in later years of the MTFS period when the fiscal gap widens.
The pre-policy baseline presented in the MTFS assumes pay growth at 3% in 2025-26, 2.9% in 2026-27 and 2028-29, and in line with inflation thereafter. However, the figures presented in the pre-policy baseline show that these assumptions have already been breached, with a year-on-year increase of 5.5% in 2025-26 and 3.2% in 2026-27, driven largely by agreed single-year pay deals and some multi-year deals.
The MTFS illustrates that a 4% annual pay award to the public sector, excluding health, would increase the pay bill by £132 million in 2025-26. However, as any larger than planned pay award impacts the baseline in all future years, the total impact would be £1.6 billion from 2027-28 to 2029-30. This scenario illustrates the impact of pay awards not only on the current fiscal year but future years through changes to the baseline. This highlights the importance of adopting realistic pay growth assumptions in budgetary and fiscal forecasting.
The MTFS estimates that the 2025-26 pay bill will be £122 million higher than projected in the PSPP, based on just six agreed pay deals. Although all agreed pay growth rates exceed the assumptions in the MTFS forecast, they have been incorporated into the pay bill projections. The NHS Agenda for Change and Scottish Prison Service pay deals are the most significant with awards of 4.25% in 2025-26 and 3.75% in 2026-27 with an inflation protection of 1 percentage point above CPI inflation. Since the MTFS was published, unions have voted to accept the Convention of Scottish Local Authorities’ (COSLA) pay award offer of 4% in 2025-26 and 3.5% in 2026-27 for local government employees.
How have the Scottish Fiscal Commissions (SFC) forecasts changed following the UK Spending Review?
The SFC published its economic and fiscal forecasts on 29 May, prior to the UK Spending Review. Alongside the MTFS, the SFC provided an update to reflect developments on the funding position for the Scottish Budget.
Total funding is expected to be £485 million higher in 2025-26, mostly reflecting additional funding being carried over from 2024-25, as well as some additional block grant adjustment (BGA) funding from UK Government changes to Winter Fuel Payment in England.
However, over the forecast period total funding is expected to grow more slowly than previously forecast. Total funding by 2030-31 is forecast to be £994 million lower than the May 2025 forecast – with revenue funding £700 million lower and capital funding £293 million lower. This reflects announcements in the UK Spending Review, which concentrated spending in reserved areas to a greater degree than assumed by the SFC in the May report (the SFC had assumed in its May 2025 forecast that the block grant would grow at the same rate as overall departmental spending in the UK).
The forecast update also reflects policy developments. The Scottish Government’s intention to start mitigating the two-child limit from March rather than April 2026 means that there is expected to be £11 million additional spending in 2025-26, as well as a £53 million increase in expected costs of Pension Age Winter Payment in 2025-26.
The SFC also makes a first forecast for Scottish Aggregates Tax (SAT). The BGA process for SAT has not yet completed, so the forecast revenues will not yet have an impact on the Scottish budget. The SFC forecast around £37 million per year from 2026-27, so even a significant deviation between Scottish and rUK tax revenues is unlikely to have a material impact on the overall net tax position.
The SFC highlights that pay deals agreed so far in 2025-26 are above the public sector pay policy – which as noted above has implications for the achievability of future resource spending targets. The Scottish Government’s workforce reduction target of -0.5% per year is expected to deliver savings of around £100 million in 2026-27, rising to £700 million in 2029-30.
The SFC states that:
The Scottish Government has set out the scale of the fiscal challenge in the MTFS. The Scottish Government’s Spending Review later this year will be an important step in providing more details on how it will deliver on the ambitions presented in the FSDP.
How will the Scottish Government meet these fiscal challenges?
If the MTFS illustrates the forthcoming ‘gap’ in Scotland’s devolved public finances, the Fiscal Sustainability Delivery Plan (FSDP) gives an outline of how the Scottish Government intends to plug this gap. That said, it’s not clear how the measures in this plan add up to the £2.6 billion resource fiscal ‘gap’. The FSDP is confined to the resource budget – the Scottish Government’s infrastructure investment pipeline in December will set out similar actions for capital spending.
The plan revolves around three pillars – one on controlling public spending, another on growing the economy, and a third on growing tax revenues whilst protecting the economy’s competitiveness.
The plan states that in the short term, “the most immediate lever by which we can improve fiscal sustainability is public spending”. This is the focus of the first pillar, which is by far the most substantial. There is an overlap between this pillar of the FSDP and the recently announced Public Service Reform Strategy.
The approach is centred around four measures:
- Increasing public value. This includes commitments to review all spending lines against outcomes, improve the evidence base for existing spending, and prioritise higher impact spending. The detail is left to the Scottish Spending Review (expected alongside the 2026-27 Scottish Budget).
- Efficiencies and productivity. This is the most closely linked to the Public Service Reform Strategy, and involves reducing the cost of corporate functions, scaling automation, sharing services, and maximising efficient use of the public sector estate. A central part of this is the public sector workforce. There is an intention to reduce the size of the workforce across the devolved public sector by an average of 0.5% per annum over five years. The FSDP says that “frontline services will remain protected as this is taken forward”.
- Service reform. The FSDP defines this as “changing the way we deliver services to secure the same or better outcomes for lower cost in the longer term”, before setting out previously announced reform programmes across different parts of government, such as the Health and Social Care Service Renewal Framework and NHS Scotland Operational Improvement plan.
- Prevention. Preventative spending that reduces demands on public services is a longstanding – but arguably hard to achieve – objective for the Scottish Government. The FSDP lists existing strategies with this aim, including those around reducing child poverty, improving population health, reoffending prevention and tackling homelessness.
The FSDP quantifies the expected annual savings across this pillar by year five of the plan – £0.7 billion from workforce reduction, £1.5 billion from public sector efficiencies, productivity, reform, and revenue raising, and £0.7 billion from increasing public value. Whilst this is useful for parliamentary scrutiny, no detail is provided on how these figures were reached.
The second pillar aims to grow the economy and tax base by increasing business activity, employment and wages. To achieve this, the plan points to existing strategies, rather than new commitments. Specifically, these are the National Strategy for Economic Transformation, the Green Industrial Strategy, and the two Programmes for Government since John Swinney became First Minister.
The FSDP doesn’t quantify how much additional economic growth these strategies and measures are expected to deliver.
The third pillar is entitled “Ensuring a strategic approach to tax revenues which considers the longer-term impact of our tax choices and competitiveness”. It nods to the previously announced Tax Strategy and includes commitments to review existing taxes, commission research on the impact of tax policy, and improve tax compliance. It does not make concrete policy choices around tax – these are left to future budgets.
Overall, the FSDP does indicate the broad measures the Scottish Government intends to take to manage the resource-side fiscal ‘gap’ presented in the MTFS. However, much of the detail – and difficult decisions – are left to future budgets and spending reviews. There are no significant new announcements.
For parliamentary scrutiny, it will be important that progress updates against this plan are published, so that Parliament can examine the extent to which the FSDP is delivering the expected savings, economic growth and tax revenue, and how all of this affects frontline services., so that Parliament can examine the extent to which the FSDP is delivering the expected savings, economic growth and tax revenue, and how all of this affects frontline services.
How has the MTFS has changed over Session 6 of the Scottish Parliament, and to what extent does this satisfy the purposes set out by the Budget Process Review Group?
A key recommendation of the Budget Process Review Group (BPRG) was a move to “year-round” budget scrutiny, underpinned by two key strategic documents published by the Scottish Government to inform Parliament’s pre-budget scrutiny of the Government’s budget. The first of these was the MTFS (to be published annually, normally in May) and the second was the Fiscal Framework Outturn Report (FFOR) to be published annually in September/October.
This MTFS represents the fourth and final publication of its type in Session 6 of the Scottish Parliament. This is an ideal moment, therefore, to look back at how the publication has developed over time, and if it has, in its most recent form, met the aspirations of the BPRG
In our pre-MTFS blog, we highlighted concerns raised by Professor Mairi Spowage and Professor David Bell about shortfalls in the 2023 publication, including a lack of detail on the challenges faced by the Government, and there being little read across from the MTFS to the Programme for Government (PfG) and the National Performance Framework (NPF). We also noted that in its 2022 review of the MTFS, the Finance and Public Administration Committee recommended that the MTFS should:
- present information consistently from year to year,
- enhance transparency through publishing a more comprehensive set of tables in the annex,
- Include detailed information on spending priorities, future spending trends across portfolios, and cross cutting issues such as climate change,
- Include detailed information on fiscal risks, including setting out how the Scottish Government would mitigate these.
- Factor a single definitive statement of tax and spend policies into the MTFS
The Scottish Human Rights Commission suggested in its Open Budget Survey 2023 Report that, with suggested amendments, the MTFS could play the role of a pre-Budget statement. This would allow committees to scrutinise the Scottish Government’s proposed spending priorities in advance of the Budget being drafted, creating a more meaningful pre-Budget scrutiny process. The SHRC explains that “this would require more detailed information on broad sectoral allocations, and descriptions and costings for new policy measures.”.
In its 2025 MTFS reaction blog, the Fraser of Allander Institute (FAI) agrees that previous MTFS publications have not fulfilled this purpose, explaining:
The previous editions appeared to be a strategic document, but in the past has more often than not felt like a political statement, more aimed at managing expectations of what might be funded than in setting out a credible central scenario. One of our criticisms in the past has been that we are not sure how the projections in the document of what might be required for spending were arrived at
On a more positive note, it continues:
This criticism has been remedied in the version of the document that was published this week.
Detail on how projected spending has been calculated, and forecasting of economic indicators from both the SFC and OBR covering GDP, employment, earnings and inflation have been used to illustrate context around Scotland’s economic outlook. The Scottish Government has also set out its strategic approach and intended actions to address the funding challenges it has highlighted.
In general, presentation of the MTFS over Session 6 has not changed significantly, though at the same time there is little consistency in the supplementary tables and charts offered, making it harder to see the longer-term picture.
The number of annexes and detail contained within has, however, grown. This includes more detail on the framework for the Scottish Spending Review, and information about workforce and pay bill. As the FAI notes, the added detail is a positive step, though it has not been made available in spreadsheet form which will be a frustration to external analysts.
The FAI flags several areas where detail and connections between spending commitments is not entirely clear and suggests that in future there could be “more clarity about how the commitments in the different plans relate to each other”.
Detail on spending outlook is richer than in the past, but still largely based on forecasted demand-led expenditure. The most indicative detail lies in detail on the Capital spending outlook, and in the statements that outlooks assume current policies and services will continue and that priority spending areas have not changed. This continues into the expanded section on the Government’s strategic approach to the public finances, where committees may find hints of where priorities lie, but the level of detail that stakeholders aspire to is more likely to be found in the Scottish Spending Review which will be published alongside the 2026-27 Scottish Budget.
In both the 2021 and 2022 MTFS publications, the Scottish Government explained:
The role of the MTFS is to set out Scotland’s fiscal outlook over the next five years, including the risks that may impact on the Scottish Government’s fiscal position. It is not intended to set out detailed spending plans or explain how prioritisation decisions will be made to meet policy objectives, in line with the recommendations of the Budget Process Review Group.
This narrative has been absent in the two most recent publications, and the changes made suggest that the Scottish Government is moving towards the more constructive and transparent document that stakeholders are looking for. However, the lack of detailed indication of potential spending shifts, limited reference to Programme for Government commitments, and complete lack of reference to the National Performance Framework and outcomes-based prioritisation of spending might leave committees and fiscal analysts wanting.
Key questions and challenges for pre-budget and Parliament
The MTFS, FSDP and the forecasts from the SFC set out the fiscal context ahead. Parliamentarians may wish to consider the following issues in their approach to pre-budget scrutiny:
- The MTFS suggests there will be significant pressure on resource budgets in the coming years, and signals that health and social care, and social security are likely to remain priorities. Other subject committees may wish to consider the implications for their portfolio areas.
- In particular, there is some information in the FSDP around service reform which may be useful to subject committees.
- One area where the MTFS provides greater certainty is local government spending, which is expected to rise by only 2% per year – close to the expected medium-term rate of inflation.
- One key question is whether the FSDP will deliver the required £2.6 billion in resource savings by the end of the forecast period, especially in the context of public sector pay deals which are being agreed which exceed the rates set out in the public sector pay policy.
- Capital spending plans run considerably ahead of anticipated resources over the period, and the Scottish Government has already highlighted the aging asset base as a key risk to Scotland’s finances. Subject committees may wish to explore how the Scottish Government is prioritising available capital spend to ensure the right priorities are being addressed.
Andrew Feeney-Seale, Rob Watts, Ailsa Burn-Murdoch and Andrew Aiton, SPICe, and Sarith Fernando, Economic Futures Placement Student