This blog sets out ten charts which explain the key measures included in the 2026-27 Budget as the Bill moves to Stage 3 of the Parliamentary process. The blog also summarises the changes since the Budget Bill was published on 13 January 2026. For more detail and context, take a look at the Financial Scrutiny Unit’s Budget briefing and other SPICe blogs relating to the 2026-27 Budget.
Resource funding rises very modestly after adjusting for inflation, while capital funding declines very slightly
Total Managed Expenditure (TME) is the broadest measure of spending, and comprises Resource, Capital, non-cash Resource and Annually Managed Expenditure (AME). Resource (which covers day-to-day expenditure) and capital (covering spending on buildings and physical assets) are the elements of the budget over which the Scottish Government has discretion.
There is wide variation in the budget changes for different portfolios
Total discretionary spending (resource and capital funding) rises by just 0.1% in real terms, however there is some variation across portfolios. The Social Justice capital and resource budget rises by 6.3% in real terms, Health and Social Care by 1.1%, and Housing by a significant 16.4%. Partly offsetting this are real terms reductions for Climate Action & Energy (-19.5%) and Finance & Local Government (-7.2%). These figures compare the 2026-27 Budget with the 2025-26 Budget after Autumn Budget revisions.
The Scottish Government has set income tax policy to meet commitments
The Scottish Government announced some relatively minor changes to taxation, but these ensure that commitments in relation to income tax are met. The starter and basic bands will be increased by 7.4%, which will reduce the amount of tax paid by most taxpayers. The result of this change is small however, worth a maximum of £31.75 per year. This change, on current forecasts, suggests that 55% of taxpayers will pay less than they would under the rest of the UK (rUK) income tax regime – although the difference for most is also small at a maximum of £40 per year. Higher rate taxpayers will continue to pay more income tax in Scotland than they would in the rUK.
Scottish income tax receipts and the block grant adjustment are both forecast to increase, in part due to the Scottish and UK Government’s freezing of some income tax thresholds
The amount added or deducted from the Scottish Budget through the partial devolution of income tax is known as the ‘income tax net position’. This is the difference between Scottish income tax revenues and the income tax Block Grant Adjustment (BGA). The income tax BGA reflects what Scotland would have raised in income tax had it retained the same tax policy as rUK and if Scotland’s per capita tax revenues had grown at the same rate as the rest of the UK.
In 2026-27, the SFC forecasts that the income tax net position will be £969 million. This means that the Scottish Budget benefits by around £1 billion through the partial devolution of income tax.
The SFC had previously forecast that the income tax net position for 2026-27 would be £1,314 million – higher than it is now forecasting. In May 2025, this forecast was revised down again to £1,072 million. According to the SFC, the latest downward revision reflects lower than expected Scottish Income Tax outturn data for 2023-24 and the effect of a larger upwards revision to UK average earnings growth in the latest OBR forecasts.
Any differences in the growth in earnings in Scotland compared to the rest of the UK have an important bearing on Scottish income tax receipts
The key factor determining the performance of Scottish and rUK income tax receipts is average earnings growth. The forecast for Scottish nominal earnings growth has remained broadly stable at 2.9% in 2026-27 and 2.7% in the two following years. The impact of lower productivity growth on projected earnings is partly offset by higher inflation in the short term.
However, the Office for Budget Responsibility (OBR) forecasts for UK earnings growth have increased from 2.1% to 3.2% in 2026-27. The result is that earnings growth in Scotland in 2026-27 is forecast to be slightly lower than the UK average, for which the SFC highlights relatively weak earnings growth in the North East of Scotland.
This change to the outlook for relative earnings growth matters because it affects the forecasted income tax net position. It is worth noting here that the OBR continues to forecast lower earnings growth for the UK than the SFC forecasts for Scotland from 2027-28 – a continuation of a trend since December 2022. In each year since then, the OBR has upgraded its forecasted UK earnings to be more in line with the SFC forecasts for Scotland. This is important because if this trend continues, then future income tax net positions would not be as positive as currently forecast, meaning that funding for future Scottish budgets may be lower than currently planned for.
Social security payments continue to grow, and are forecast to account for 14% of the resource budget in 2026-27
While total resource funding in the 2026-27 Budget is forecast to grow by 1.1% compared to last year, most of this increase is accounted for by social security spending. Once this is stripped out, resource funding for public services is set to increase by a much smaller 0.2% year-on-year. This increase in social security spending largely reflects existing policy and forecast expenditure. [Note, various definitions can be used and these calculations are based on those used by the Scottish Fiscal Commission.]
It was confirmed that, in 2026-27, devolved benefit payments will increase in line with the September 2025 CPI inflation rate of 3.8%. The only significant policy announcement on social security was a decision to increase the Scottish Child Payment to £40 per week for children under the age of one (it was £27.15 per week in 2025-26). This however will only take effect in 2027-28, so it is not a cost in the 2026-27 Budget.
Local Government – All about the Baseline
Total Local Government resource allocation using different baselines
In her statement to Parliament, the Cabinet Secretary for Finance and Local Government told the Chamber:
“Overall, funding for local government will increase by 2 per cent in real terms comparing budget to budget…”
This is true – comparing Budget 2026-27 to Budget 2025-26 does indeed show a real terms increase in resource allocation of around £419 million. However, the Institute for Fiscal Studies believes that such a comparison “flatters the actual change in spending power of councils”.
Since the 2025-26 Budget was announced in December 2024, local government has received additional money from the Scottish Government, for example transfers of £144 million for employer national insurance contributions and £109 million for pay deals. Local Government will continue having to cover these costs in future years.
The Scottish Fiscal Commission has attempted to account for these “baselined” transfers in its calculations and believes that the increase in local government spending power resulting from the 2026-27 Budget will be closer to 0.4%.
These differences in interpretation were discussed extensively in a recent Finance and Public Administration Committee session with the Cabinet Secretary.
Of the £5 billion identified as contributing to reducing emissions, the majority is accounted for by spending on public transport
The Cabinet Secretary’s statement to Parliament also highlighted that in the 2026-27 Budget, the Scottish Government is:
“committing over £5 billion this coming year toward measures that will reduce Scotland’s carbon emissions, increase our resilience in the face of climate change, and in many cases, save families hard-earned cash.”
The 2026-27 Budget includes the third climate assessment narrative which, along with the taxonomy and the carbon assessment, provide an overview of the impact of spending decisions on the climate, and provide some detail on the £5 billion figure mentioned by the Cabinet Secretary.
A significant proportion of the £5 billion figure relates to the ongoing investment in transport. In the Climate Change Plan, the Scottish Government outlines that emissions from transport will have to fall by 68% by 2040, which is by far the largest sectoral contribution to emissions reductions over this period.
Housing, Constitution and External Affairs, Social Justice and Transport are set to see the largest percentage increases in their combined resource and capital budgets over the spending review period
The Scottish Government has published a first Scottish spending review since 2022, and a new four-year Infrastructure Delivery Plan, as well as launching a consultation on a new 10-year Infrastructure Investment Plan. These are welcome publications which increase understanding of the Scottish Government’s priorities, and the fiscal context. Although with May’s election looming, the next Scottish Government may have different priorities and adopt different plans.
The analysis shows that housing is set to see the strongest growth in combined resource and capital funding, increasing by 26% over the spending review period. Constitution, External Affairs and Culture also grows strongly in the first two years, reflecting a number of important events being hosted in Scotland. Transport, Social Justice and Health and Social Care also see positive real terms growth throughout the period. Other areas see real terms reductions over the spending review period, with Climate Action and Energy seeing the largest fall of 23% over the three-year period.
The Health and Social Care portfolio is expected to contribute a significant proportion of the efficiency gains planned as part of the Public Service Reform agenda
The Spending Review sets out some more detail on how the £1.5 billion public sector efficiencies and reforms are to be achieved. Health and Social Care will do the heavy lifting, with over £1 billion of the total planned savings over three years to come from this sector. There is repeated reference to the intent to “protect” or “free up” investment in frontline services through the reforms.
NHS Boards will have to achieve recurring annual savings equivalent to 3% of their baseline revenue resource limit. The latest Audit Scotland report, covering the 2024-25 financial year, shows that boards achieved recurring savings of 2.2%, so meeting this target will require an improvement from current performance.
Changes to the Budget Bill since introduction
The Cabinet Secretary for Finance and Local Government wrote to the Finance and Public Administration Committee on 12 February to outline several amendments to the Budget Bill at Stage 2, to give effect to the deal agreed with the Liberal Democrats. These are:
- An additional £20 million is to be provided to local government to support payment of the Real Living Wage for social care workers.
- The Deputy First Minister, Economy and Gaelic portfolio will receive £5.53 million to extend the Investing in Communities Fund by one year.
- The Transport portfolio will receive a further £4.3 million to support a rail fare freeze during 2026-27.
This additional £30 million will be funded by a drawdown of Scotwind income.
The Cabinet Secretary also outlined two changes to the budget which do not require amendments.
The Budget as presented at Stage 1 included provision for £6.5 million to deliver pay parity with the NHS Agenda for Change for hospice staff. Following engagement with the sector, a further £2.9 million will be provided in 2026-27.
Eligible licenced premises (such as pubs, restaurants, hotels and nightclubs) and music venues will benefit from an additional 25% Non-Domestic Rates relief for the next three years, which the Scottish Government estimates will be worth £9 million in 2026-27. Gross bill increases due to the revaluation will also be capped at 15% year-on-year for the next three years.
What’s next?
The final parliamentary Stage 3 proceedings to formally pass the Budget Bill (authorising devolved spending for 2026-27) will take place in the Chamber next Wednesday afternoon (25 February).
Financial Scrutiny Unit and Data Visualisation, SPICe