The UK Budget confirmed a top-up to day-to-day (resource) funding
for the Scottish Government this year of £1.5 billion, with a
further £1.4 billion increase on top of this planned next year.
While the total amount available to spend will also depend on
forecasts for devolved tax revenues, and on decisions over
borrowing, reserves and the use of income from ScotWind windfarm
licences – all of which are uncertain – it is clear that the UK
Budget has significantly improved the short-term funding outlook.
If the Scottish Government chooses to spend all of the additional
£1.5 billion this year, it will be able to spend around 4.9% more
on public services in real terms than in 2023–24, up from the
cut of 0.6% implied by its initial spending plans. If it
instead spent half and carried forward half, the increase would
still be around 3.1%. Carrying forward at least some funding from
this year looks likely to be a wise move, as the front-loaded
nature of the top-ups to resource funding implied by the UK
Budget means that year-on-year increases in Scottish Government
funding are set to be much smaller in future years, implying
tough choices over what services to prioritise in Scottish
Budgets.
The time-path for capital funding looks similarly front-loaded,
with a big increase in 2025–26 but little change in the following
three years. Again, the Scottish Government should use its
borrowing and reserve powers to smooth this trajectory: it will
likely get more bang for its buck with more time to plan this
increase in investment.
David Phillips, an associate director at IFS who leads
its work on devolved and local government finance, said:
‘Funding from the UK government remains the most important
determinant of the total resources available to the Scottish
Government. So, while both forecasts for devolved tax revenues
and decisions over borrowing and use of reserves and income from
windfarm licences will matter too, it is clear that the overall
funding situation is much better after the UK Budget.
‘The Scottish Government could spend up to an extra £1.5 billion
on day-to-day spending this year on top of increases it already
made in its Autumn Budget Revision. It may be wise to instead
choose to bank some of this funding for future years by reducing
or even cancelling planned drawdowns in ScotWind income and
financial reserves.
‘That is because despite a further £1.4 billion increase in UK
government funding for day-to-day spending next year, growth in
overall funding is set to slow sharply – potentially to well
below 1% a year in real terms. Targeted use of reserves and the
proceeds of ScotWind windfarm licences in future years,
particularly in initiatives to boost public sector productivity,
could help reduce the pain such small increases in funding would
otherwise imply.'
Bee Boileau, a research economist at IFS and another
author of the analysis, said:
‘Higher funding will enable much more spending this year than
previously expected. Health was the big beneficiary of top-ups
for the current year made prior to the UK Budget, and it would be
surprising if the NHS in Scotland did not now receive a further
top-up. But the scale of funding provided by means the Scottish Government
could also choose to undo a number of cuts to other areas of
spending announced earlier this year if it wanted.
‘Looking to next year and beyond, though, unless the Chancellor
further tops up UK-wide spending plans, or the Scottish Finance
Secretary raises Scottish taxes
significantly, the trade-offs between services will be much more
challenging. If health spending were to continue to grow at the
rate seen in recent years, many other areas of spending would
almost certainly face cuts – perhaps as soon as next year.'
