This is an initial blog analysis of the 2026-27 Budget. More detailed SPICe briefings and additional blogs will follow in due course.
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This afternoon the Cabinet Secretary for Finance, Shona Robison MSP, presented the Scottish Government’s tax and spending proposals for 2026-27 to Parliament. This is the final budget of the sixth session of the Scottish Parliament, and with just under four months to go until the next Scottish election it will be down to the next Scottish Government to implement this.
The Medium-Term Financial Strategy, published in June 2025, set out the challenging fiscal context for the Scottish Budget. Taking current spending plans, the Scottish Government faced a £963 million shortfall in resource funding and £1.07 billion in capital. Some of this pressure was eased before the Cabinet Secretary gave her statement however, as the UK Budget in November 2025 resulted in Barnett consequentials of £330 million, while the fiscal framework outturn report noted that a positive reconciliation of £361.5 million would be applied to the Scottish Budget for 2026-27. In addition, planned expenditure of £126 million to mitigate the two-child cap would no longer be required, which the Scottish Government pledged to redeploy to reduce child poverty.
The Cabinet Secretary highlighted several key decisions taken in the Budget, including:
- £49 million for measures to be announced in March 2026 update of Child Poverty Delivery Plan.
- The Scottish Child Payment will increase in line with inflation, to £28.20. From 2027-28, a new rate of £40 per week for children aged under 1.
- On taxes, the basic and intermediate rate thresholds of income tax will increase by 7.4%. Two new council tax bands for properties valued above £1 million and £2 million, and plans to progress the implementation of Air Departure Tax (including a planned supplement for private jets).
- £70 million increase in capital and resource funding for colleges.
- Scrapping peak fares for Northern Isles Ferries.
- £36 million for the roll out of high street walk-in GP clinics.
- £57 million increase for additional support for learning in education budget.
The Scottish Fiscal Commission published updated economic and fiscal forecasts
The Scottish Fiscal Commission (SFC)’s forecasts of Scotland’s economic performance are largely unchanged compared to last year’s budget. Levelling off at 1.5% per year by 2028-29, GDP growth forecasts remain subdued by historical standards. These are in line with the OBR’s projections for the UK.
Scotland’s labour market forecasts slightly weaken in the short term, which the SFC attributes to economic uncertainty and higher labour costs weighing on business confidence and labour demand.
Earnings growth projections are largely unchanged for Scotland since last year. However, the OBR upgraded the UK’s earnings forecasts by 1.1 percentage points in 2026-27. This changes the outlook for relative earnings growth and therefore relative income tax revenues. The result is a lower than previously forecast income tax net position for 2026-27 of £969 million (versus £1,314 million in previous forecasts).
There is also a significant reduction in the anticipated negative reconciliation for income tax in 2027-28. This was previously expected to be a large negative reconciliation of £851 million, which would have been larger than the limit on the Scottish Government’s resource borrowing. However, due to reduced receipts for rUK income tax, this has been revised down to a forecast £330 million negative reconciliation.
Also of note is a downgrade to projected productivity performance, which economists have described as the economy’s ‘speed limit’. At 0.3 percentage points by 2029-30, the downgrade is similar to the OBR’s downgrade of its forecasted productivity growth for the UK. The impact of this on GDP growth is slightly offset by higher than previously expected population growth.
Income tax delivers a minor pre-election giveaway
The Budget increases the thresholds for the basic and the intermediate rates of income tax by 7.4%, but thresholds for the higher, advanced and top rates will remain frozen until 2028-29. The freeze to the basic and intermediate rates will reduce receipts by £50 million in 2026-27 according to the Scottish Fiscal Commission, but the impact of this on individual taxpayers is relatively modest, up to a maximum of £31.75 per year.
During 2025 there has been some debate about the Scottish Government pledge to set income tax rates in a way that aims to ensure that most Scottish taxpayers will pay less tax than they would elsewhere in the UK. However, as with wider tax policy, this is set on forecasts provided by the SFC, which are subject to change.
In recent years the Scottish Government has allowed a relatively small margin for error. The 2025-26 Scottish Budget suggested that 51% of taxpayers would pay less than they would in the rest of the UK. A relatively small increase in average earnings, however, could result in most taxpayers in Scotland paying more than they would in the rUK.
In November 2025 the SFC published an update to their estimates of median income in Scotland. This update suggests that someone earning an income of £30,318 or above would pay more income tax in Scotland than they would elsewhere in the UK. According to the SFC, in 2025-26 this is expected to be 49.1% of Scottish taxpayers. However, outturn data for 2023-24 shows that most taxpayers paid more in Scotland than they would have in the rest of the UK, and the update forecast for 2024-25 also suggests that most Scottish taxpayers will pay more.
In the 2026-27 Budget, the Cabinet Secretary has given herself a little more headroom in setting income tax in a way which should mean that 55% of Scottish income taxpayers pay less than they would in the rUK. However, the differences are small for this group of taxpayers – only between £10 and £40 per year.
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.
New council tax bands will increase bills for the most expensive homes
The UK Budget in November included plans to introduce a council tax surcharge on properties valued above £2 million from 2028, dubbed a ‘mansion tax’. The Scottish Budget includes a proposal to introduce two new tax bands for properties valued above £1 million from April 2028. Band I will apply to properties valued between £1 million and £2 million, and Band J will apply to those valued above £2 million. The Scottish Government notes this will be based on an ‘up to date’ valuation of those properties, not the 1991 value that is used to calculate council tax liability normally. This suggests that a partial/ targeted revaluation will be required to determine liability for the new bands, with the Budget setting aside £5 million to carry this out. The Scottish Government suggests this will affect fewer than 1% of properties, with the BBC noting in their coverage of the Budget that only 391 properties sold for £1 million or more in 2024-25.
No change (yet) on income from property
In the 2025 UK Autumn Budget, the UK Government announced a 2p increase to the rates of income from property, starting in 2027-28. The UK Chancellor pledged to devolve the powers for the devolved administrations to implement policy in this area. The Scottish Budget does not provide any specific commitments to plans to implement this in Scotland, stating that:
“The UK Government has committed to devolve an equivalent power, to set a separate rate for property income in Scotland, as part of the UK’s annual Finance Act. Subject to legislative consent from the Scottish Parliament, the first year this power could come into effect would be 2027-28.”
After a long delay, Air Departure Tax is finally expected to land in 2027
While the Air Departure Tax (Scotland) Act was passed by the Scottish Parliament in 2017, this has not been implemented as the Scottish Government expressed concerns about the future of the exemption for Highlands and Islands airports. The Budget states:
“we have developed proposals for a new Highlands and Islands exemption that will allow us to move forward and implement ADT in Scotland. A consultation will launch by the end of January 2026 on the proposed new exemption, and will be accompanied by a programme of engagement with the aviation industry and the communities and businesses that the exemption is designed to serve.”
The Scottish Government states that this ‘overcomes’ the main barrier to implementing ADT, and therefore ADT will become operational from 1 April 2027. The Budget pledges to match rates and bands of UK Air Passenger Duty in 2027-28, before introducing Scottish rates and bands from 2028-29. In 2028-29, the Scottish Government will also introduce a private jet supplement.
Support for businesses with non-domestic rates bills
Last week, the Scottish Parliament held a debate on non-domestic rates (NDR) and the impact of increased bills on businesses across Scotland. This came after business owners received draft notices at the end of November showing changes to the rateable value of their properties. It is clear from this debate that the revaluation is causing considerable concern across several sectors, particularly amongst hospitality and retail businesses.
The Budget includes measures aimed at softening some of the impacts of the 2026 revaluation. Firstly, the Government will reduce the basic property rate (for properties with a rateable value up to and including £51,000) from 49.8p to 48.1p. Similar reductions will be seen for the intermediate and higher property rates.
A new 15% non-domestic rates relief will be available from April 2026 to March 2029 for retail, hospitality and leisure premises liable for either the basic or intermediate property rates. There are also two transitional relief packages for businesses seeing considerable increases to their rateable values in April 2026. In addition, the Cabinet Secretary committed to continuing the Small Business Bonus Scheme for the next three years. The Cabinet Secretary concluded:
“In total, including the small business bonus, over 96 per cent of retail, hospitality and leisure properties will pay zero or reduced rates. Together, this provides revaluation and retail, hospitality and leisure support worth £322 million over the next three years.”
How these reliefs compare to those announced by the UK Government (for NDR payers in England) at the Autumn Budget Statement will undoubtedly be explored over the coming weeks. It’s also interesting to note that the Scottish Government could improve the support available depending on possible announcements by the UK Government:
“We are still awaiting details from the UK Government about possible changes to business rates for pubs in England, following press speculation last week. But I can assure members that, if additional resources become available, we stand ready to use these to provide even further support for the sector in Scotland.”
The outlook for capital funding remains constrained
The 2026-27 Budget has a total of £7,568 million in capital and financial transactions funding available, which is an increase of £146 million compared to the 2025-26 Budget (2% higher in cash terms, or a 0.3% decrease in real terms ).
The Transport portfolio accounts for the largest share of total capital spending (31.3 per cent), with an 8% real terms increase from 2025-26 to 2026-27.
The next largest share of total capital spend is the Housing portfolio (14.3 per cent), which has seen a significant real terms increase of 17%.
Despite Finance and Local Government accounting for a large share of the total capital spend (14.1 per cent), it has seen a real terms decrease of 18.6%.
According to the SFC:
“The Scottish Government has taken the decision to reduce capital funding in-year to minimise any underspend. This reduces capital funding by £226 million in 2025-26. Capital funding has increased by £214 million in 2026-27 compared with our June 2025 forecast. There is an average increase in capital funding of £176 million throughout the forecast period, equivalent to 2.3 per cent of the capital budget. However, in real terms, capital funding is falling by 5 per cent between 2025-26 and 2030-31.”
One potential source of capital funding for the Scottish Government is income from Scotwind. The Scottish Government plans to use Scotwind revenues to bolster both capital and resource positions over the spending review period. Planned capital utilisation in 2025-26 has reduced however from £364 million to £153 million, with £23 million being utilised to support resource spending. A further £50 million will be used for resource spending in 2026-27, with £92 million in capital funding in 2028-29 and £99 million in 2029-30.
Alongside the Budget, the Scottish Government publish long-awaited information on longer term infrastructure priorities
The Scottish Government has published two documents alongside the Budget relating to longer term planning for capital investment; the Infrastructure Delivery Pipeline and a Consultation on the Infrastructure Strategy 2027-2037.
The Infrastructure Delivery Pipeline (IDP) sets out infrastructure plans for the next four financial years from April 2026 to March 2030. It covers projects over £5 million and programmes over £20 million. Some of the projects listed include:
- A9 Dualling Programme
- Rail Services Improvement and Decarbonisation programme
- Ambulance Replacement Programme
The IDP is a continuation of the pipeline set out in the 2021 Infrastructure Investment Plan (IIP), and some projects and programmes listed as they are near completion. However, a few projects listed in the 2021 IIP have not been listed specifically in the new Pipeline. These are in the Health Sector, where the Scottish Government is working with all Health Boards to develop a whole system infrastructure plan (WISP).
The IDP confirms that the Scottish Government will continue to deploy revenue-funded models, including the Mutual Investment Model (MIM):
“Any deployment of MIM would be to deliver additional investment over and above constrained capital budgets assessed to be necessary to meet our investment ambitions.”
Through MIM, the Scottish Government is expecting to deliver community health centres. Three initial projects to be supported (Port Glasgow, East Calder and East Livingston, Cowdenbeath and Lochgelly). A further nine projects are to be considered for inclusion in first tranche. The Scottish Government suggest capital value of all twelve schemes will be above £500 million.
Alongside the Pipeline, the Scottish Government published a Consultation on the Infrastructure Strategy 2027-2037. The document focuses on high-level priorities, rather than detailed portfolio plans. We can expect the final strategy to be published later in 2026.
The Scottish Government also published its first spending review since 2022
This Spending Review document provides some detail on portfolio resource allocations over the next three years, and capital over the next four years. The level of detail provided varies by portfolio – some are down to level 4 including health and social care, local government plans are provided to level 3, while others only show level 2 such as Education and Transport.
The SFC notes that this is less detailed than the 2011 spending review, which provided level 3 for all portfolios:
“Given that many public body budgets are at level 3, it is not possible to look at the document and see the funding outlook for key public bodies like Skills Development Scotland and SEPA, or to see how level 2 budgets are split between resource and capital.”
So, while this provides some welcome detail, it is patchy – for example, for health, the indicative budgets for individual health boards will be welcome, but there is a notable gap in terms of other areas of the health budget that does not get directed to health boards, such as GP funding. Also, the health board budgets come with major caveats:
“Actual funding could significantly change with the release of new information and subject to the annual budget process, therefore the outlined funding is highly provisional.”
A longer-term profile for third sector funding will be a welcome development for the sector, which has repeatedly highlighted the challenges that short-term funding agreements present for service delivery. Setting out a three-year budget for third sector infrastructure funding, the Scottish Government states that “this Spending Review supports our commitment to Fairer Funding for the Third Sector.”
The Spending Review also sets out some more detail on how the £1.5 billion public sector efficiencies and reforms are to be achieved. It is clear that health and social care reform will do the heavy lifting, with over £1 billion of the total planned savings to come from this sector. There is repeated reference to the intent to “protect” or “free up” investment in frontline services through the reforms.
SPICe will publish more analysis of the spending review in future blogs and briefings.
The presentation of the Budget raises some issues for year-to-year comparisons
As with last year, the Scottish Government has opted to present the Budget using the 2025-26 Autumn Budget Revision (ABR) as a baseline. This matters as there can be considerable changes to portfolio allocations throughout a financial year, as explained in more detail in a recent SPICe blog.
While some of these changes reflect evolving priorities, or additional resources becoming available, some of the significant transfers occur routinely each year. For example, funding for social care is presented under Health and Social Care in the original budget, and then routinely transferred during the year to the Local Government portfolio, as local authorities are responsible for the delivery of social care.
What this means is that comparing portfolio allocations from the Budget to allocations from the 2025-26 ABR might be misleading, depending on the impact of these transfers. This is an issue that the Finance and Public Administration Committee has raised with the Scottish Government. Table 4.15 in the Budget document shows the difference this can make; taking the ‘headline’ Local Government budget figure would show a decrease of 1.9% in cash terms, as the 2025-26 ABR figure includes transfers from other portfolios such as Education and Health, but the 2026-27 Budget does not. Removing these transfers means the cash terms increase is +3.0%. For local government, this is explained in the main body of the document, but for other portfolio areas, it is harder to unpick the detail.
Table A.09 of the main document shows the effect of routine in-year transfers and the impact of the choice of baseline is illustrated in the chart below, which shows that for some portfolio areas it makes a significant difference.
The Scottish Government has also published an ‘additional budget disclosures’ document which sets out the impact of in-year budget changes over the last three years, but it is not easy to interpret or understand all the reasons for the changes.
The Scottish Government has made some progress in this area by baselining some routine transfers, but the remaining transfers can still distort comparisons. The SFC notes that:
“While the Scottish Government has continued to improve the presentation of spending in the Budget including publishing the data showing which transfers have not been baselined, there are still further improvements to be made. We continue to recommend that all routine Budget transfers should be contained from the outset in the spending portfolio to which they will ultimately move.”
Health remains the largest portfolio allocation
At close to £22.5 billion, the Health, Social Care and Sport portfolio still represents the greatest area of spending. The Cabinet Secretary highlighted a record investment in frontline services, with the £1.4 billion cash uplift to NHS Boards representing a 6% real terms increase on last year’s Budget figures, though Level 4 data suggest that much of this funding beyond a 2% baseline uplift will be destined for pay settlements. Looking at the overall funding for Health and Social Care, compared to the figures in last year’s Budget, the uplift is a more modest increase than the Government narrative would suggest, at 1.2% in real terms. Of course, given that portfolio spending has already hit a record high, anything other than a cut is automatically going to continue to represent record highs in investment.
There is some evidence of increased spend on preventative measures and steps towards service reform. This is most noticeable in the £40.1 million cash uplift in funding on sport and activity through the SportScotland and Active Healthy Lives budget lines, the £73.4 million uplift in Education and Training within the health portfolio, and the £36 million investment within the Primary Care Fund for “initial establishment and evaluation of a series of new local walk-in GP services”.
It’s worth highlighting the complexity of understanding allocations for social care given the Scottish Government’s use of ABR figures as a baseline. Because much of the funding in this line is transferred to local government in-year, it is inevitable that Budget and ABR figures will be significantly different. Comparing Budget to Budget, cash funding for Social Care Support falls by 43% from 2025-26 to 2026-27, rather than increasing by 160% as the Government’s presentation with the ABR figure suggests. Significant funding is invested under this budget line to uplift pay for adult social care workers to the Real Living Wage, but overall, transfers between the Health and Local Government portfolios make understanding the actual changes in funding challenging.
Local government allocations grow ahead of inflation
Councillors and local government officers will welcome some announcements in the Budget. For example, the local government revenue settlement sees a real terms increase of £419 million (+2.9%) when the Budget is compared to last year’s Budget document. A smaller proportion of the settlement is ring-fenced for specific purposes or transferred in-year from other portfolios. This is something that councils will welcome as it increases local flexibility.
However – and there is always a “however” with local government funding – the increase in 2026-27 falls far short of what COSLA called for in December. They campaigned for a revenue settlement of £16 billion in 2026-27, including an additional £750m for social care.
With the Spending Review being published alongside the Budget, local government now has some indication of what funding will be available in the three years up to March 2029. Although this may provide councils with a bit more certainty, the indication is that the core revenue settlement increases initially between 2025-26 and 2026-27 but then falls slightly in real terms over the following two years.
COSLA also wanted to see a general capital grant of £844 million in 2026-27. Instead, the Budget provides £494 million. The capital allocation from the Scottish Government continues to fall, decreasing by 14% in real terms over the year, which will be a disappointment to many in local government. Presumably the Scottish Government is expecting councils to continue borrowing to fund the capital projects they need to deliver many of their services.
Social security spending is rising fast
The headline policy choice on social security was to increase the Scottish Child Payment for children under the age of one to £40 per week from April 2027 (an extra £580 per year).
Overall, devolved social security spending (which largely consists of disability and carer benefits, plus the Scottish Child Payment) is forecast to grow by an average of 5.7% per year in nominal terms between 2026-27 and 2030-31, reaching £9.2 billion. Nearly 40% of the projected increase is due to uprating payments in line with inflation and 60% due to higher take up of disability and carer benefits. Much, but not all, of this is funded through the Block Grant Adjustment (BGA), which reflects UK Government spending on equivalent benefits elsewhere in the UK.
What really stands out is devolved social security spending over and above the BGA because this has to be funded from within the Scottish Budget – either by increasing devolved tax revenues or diverting spending from other parts of the budget, such as devolved public services. This gap is forecast to be £1,082 million in 2026-27, rising to £1,202 million in 2030-31 – lower than previously forecast because the UK Government is not reducing spending on disability benefits as had been planned. Roughly two thirds of this gap is due to payments unique to Scotland, such as the Scottish Child Payment.
Public sector pay policy is unchanged, despite the large awards already agreed
The Scottish Government’s public sector pay policy remains unchanged from last year with a 9 per cent pay award limit covering 2025-26, 2026-27 and 2027-28. The agreed pay awards for 2025-26 and 2026-27 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 SFC identified risks to the Scottish Government’s spending plans and budget allocations on the basis of the public sector pay policy. One example given is related to the Agenda for Change pay award which covers over 140,000 healthcare workers, and includes most NHS staff other than doctors and demonstrates the severely limited headroom for the final year of the pay policy if the policy commitment is to be met:
“Based on the pay awards for 2025-26 and 2026-27 the public sector pay policy implies a pay award of 0.78 per cent in 2027-28 for the Agenda for Change group. A pay award above 0.78 per cent would place further pressure on health spending and suggest that either the funding allocated to Health and Social Care would need to increase, health boards would need to reduce spending on non-staff costs, or staff numbers would have to be reduced beyond current plans.”
The Cabinet Secretary has agreed to review the pay policy as part of the 2027-28 Budget process given the number of two-year pay settlements.
You can find more information on public sector pay policy in the SPICe blog.
Impacts assessments and outcomes
Supporting documents to accompany the Budget were typical of recent years. The one exception was the absence of the Equality and Fairer Scotland Budget Statement. Although the Budget document does not reference this, within the annex on Pre-Budget Scrutiny by Parliamentary Committees the Government explains that on 19 January it will publish a new Strategic Integrated Impact Assessment (SIIA) for the Budget. This new approach aims to support “the consideration of impacts together, aiming to offer a more complete understanding of the potential combined impacts of the Scottish Government’s key budget decisions on people in Scotland.”.
This means that, unlike previous years, our own analysis of the equalities and human rights impacts of the Budget will be delayed.
As in past documents, the Government has included reference to which National Outcomes it intends each portfolio to contribute towards meeting as a way of demonstrating its strategic priorities. This presentation continues, despite the Scottish Government’s decision, following the most recent statutory review of the National Outcomes, to not apply its proposed changes and instead commit to a more significant reform of the National Performance Framework.
What happens next?
Parliament now moves to detailed scrutiny of Scottish Government plans, beginning next week in committees. The timetable for parliamentary scrutiny is compressed this year in light of the later Scottish Budget date. Stage 1 is scheduled for 12 February, Stage 2 for 17 February and Stage 3 for the 25 February.
As was the case last year, this Budget comes in the context of a minority government. This would usually mean much attention was focused on negotiations to secure a deal, as Parliamentary arithmetic dictates that the SNP will require votes from at least one other party. However, the Labour Party has already indicated that it does not intend to vote down the Budget, which would mean that the Budget can pass with only SNP votes.
Financial Scrutiny Unit, SPICe