Scotland’s public sector covers a wide range of services, from healthcare and education to local government, and is a significant part of the economy. Public sector employment accounts for 22% of all employment in Scotland. It covers both reserved and devolved public sector employees. Reserved roles include staff working for UK Government departments, such as the Department for Work and Pensions, as well as the armed forces. Devolved roles include NHS Scotland employees, police and fire services, and other devolved public bodies. Out of the 596,100 people employed in the public sector across Scotland, the vast majority (92%) are devolved public sector employees.
The recent Multi-Year Pay Policy Framework, combined with the financial pressures created by inflation protection clauses, has made renumerating the devolved public sector workforce an increasingly complex challenge for Scotland’s public finances.
Public Sector Pay Policy
At the end of 2024, the Scottish Government set out a Multi-Year Pay Policy Framework from 2025-26 to 2027-28. The key features of the multi-year pay deal are:
- 9% pay envelope covering 2025-26, 2026-27 and 2027-28 i.e. pay should not increase by more than a total of 9% over the three-year period.
- Flexibility for employers to configure three-year proposals within the 9% pay envelope.
This Multi-Year Pay Policy sets out the expectation that pay deals will be agreed covering three years as mentioned. Any employer that does not agree a three-year pay deal is restricted to a maximum of 3% pay uplift for 2025-26.
When the public sector pay policy was published, the Cabinet Secretary for Finance and Local Government wrote:
“I am clear that a multi-year, above inflation approach to pay provides certainty for the public sector workforce and an opportunity for Scottish Government, employers and Trade Unions to plan for and transform our public services to improve outcomes for the people of Scotland. My expectation is that all public sector employers will negotiate multi-year deals with trade unions and staff representatives within the parameters set out in this policy.”
So, have the Cabinet Secretary’s expectations been met?
To put it simply, no. At the time of writing this blog, not all workforces within the devolved public sector have agreed pay deals for 2025-26 or beyond. The pay deals that have subsequently been agreed by Scottish public sector employers do not meet the expectation within the policy’s framework of either covering the three-year period or being restricted to a maximum three per cent pay lift for 2025-26. The Auditor General’s report on the Scottish Government’s Consolidated Accounts notes that the financial commitment associated with the pay deals agreed so far “introduces additional recurring financial pressures in the short term and has not mitigated the future year risks given many of the two-year deals agreed include inflation guarantees.”
Inflation Protection Clauses
Both NHS Agenda for Change (AfC) and Scottish Prison Service (SPS) have agreed a two year pay award with 4.25% in 2025-26, followed by a 3.75% in 2026-27. Both pay deals include an inflation guarantee which states that the pay deal will be 1 percentage point higher than the annual average CPI inflation.
This means that, for 2025-26, the inflation guarantee will be triggered if average inflation over 2025 exceeds 3.25 per cent. Note that the inflation guarantee refers to CPI inflation over the calendar year, rather than the financial year.
In the OBR’s most recent Economic and Fiscal Forecast, CPI inflation is expected to be 3.5 per cent in 2025 and 2.5 per cent in 2026, respectively 0.2 and 0.4 percentage points higher than the March forecast.
For 2025-26, the pay settlement is 4.25%. If CPI inflation for January to December 2025 exceeds the 3.25% forecast, an inflation guarantee payment will be applied to ensure the overall uplift remains 1 percentage point above average CPI inflation.
If this inflation forecast turns out to be accurate, the inflation guarantee forces the pay award to increase from 4.25% to 4.50%.
- CPI Inflation = 3.5%
- Current 2025-26 pay award = 4.25%
- Inflation Guarantee = 3.5% + 1% = 4.50%
- Additional uplift required = 4.50 – 4.25 = 0.25 percentage points
The Scottish Government’s Medium Term Financial Strategy 2025 (MTFS) noted that “as a general measure, and everything else being equal, every 0.1 percentage point increase in the pay award would cost an extra £9 million for AfC and £0.3 million for SPS in 2025-26.”
Based on the MTFS calculations, current CPI inflation forecast, and inflation guarantees, SPICe estimates that the 0.25 required uplift would cost the following:
- NHS AfC cost = £22.5m
- SPS cost = £0.75m
- Total cost of inflation guarantee activated = £23.25m
This demonstrates how the inflation guarantee makes the public sector paybill very sensitive to even small increases in the rate of inflation.
Funding the Public Sector Pay Policy
It is worth noting that public sector pay accounts for 55.0 per cent of the entire Scottish resource budget in 2025-26.
Where pay deals have been agreed (NHS Agenda for Change, Scottish Prison Service and ScotRail and Caledonian Sleeper) the Scottish Government is estimating costs to be around £122 million higher, compared to the costs expected under the Public Sector Pay Policy published in December 2024. Accounting for these settled pay deals the paybill for the financial year 2025 to 2026 is estimated at around £29 billion. This does not include the additional costs associated with inflation guarantees.
The Scottish Government expects “that portfolios agreeing pay deals that exceed the pay metrics will deliver efficiencies through reform to ensure the paybill remains sustainable in the medium term and all deals are based on fairness and affordability.”
It is unclear what the expectation of these ‘efficiencies’ might be, but we do know that within the Scottish Government’s Fiscal Sustainability Delivery Plan 2025 the Scottish Government is targeting a public sector workforce reduction of -0.5 per cent per annum on average over the next five years.
To quantify the potential costs or savings from faster, or slower workforce growth, the Medium Term Financial Strategy set out two alternative scenarios, as illustrated in the table below. It shows the fiscal impact of the workforce declining or increasing by 1 per cent respectively over the next five years. This is based on an assumption that the pay policy will be implemented i.e. 9% pay growth over three years, then 2% growth in subsequent years. As shown above, this has already been breached, so these scenarios do not fully reflect the current reality.
Table 1: Fiscal consequence of workforce change
(Figures in £million) | 2024-25 | 2025-26 | 2026-27 | 2027-28 | 2028-29 | 2029-30 |
Workforce reduces by 1% per annum | – | (157) | (459) | (775) | (1,098) | (1,429) |
Workforce grows by 1% per annum | – | +157 | +463 | +788 | +1,127 | +1,481 |
The latest MTFS forecasts a £963 million resource spending shortfall in 2026-27. That leaves the Scottish Government facing another tough budget round next year, with no headroom to support the inflation-triggered spending guarantees.
And with several public sector pay deals still unresolved, pay policy remains to be a significant challenge for the Cabinet Secretary as we approach the Scottish budget.
Rachel Cook, Senior Researcher, Financial Scrutiny Unit, SPICe