IFS: Scottish Budget and Spending Review signal big shifts in health and investment spending – but reliance on ambitious efficiency targets brings risk

The Scottish Budget and Spending Review set out plans for big shifts in two key areas of public spending: health and social care, and capital investment.  

For health and social care, plans imply a substantial reduction in the share of funding going towards hospitals and the ambulance service, and a big increase in the share going to other services, such as primary care and social care. To enable this without adverse effects on hospital performance, the Scottish Government is banking on Scotland's territorial and national health boards delivering 3% efficiency savings per year – far in excess of historical trends. Without big improvements in efficiency, hospital and ambulance performance would start deteriorating again unless other budgets were cut back to bolster core NHS funding.  

For capital investment, the news is less bad than the headline figures suggest. After increasing in 2026–27, overall capital investment is set to fall by 5% in real terms over the following three years. But the winding up and completion of the HMP Highland and HMP Glasgow prison construction programmes mean investment outside the Justice & Home Affairs portfolio is set to increase by 1% in real terms over the same period. Investment in housing is set to increase by 23% in real terms between 2026–27 and 2029–30, while investment in transport is set to increase by 3% in real terms.  

These are among the key findings in the IFS Scottish Budget Report 2026–27 published today in partnership with Scottish Financial Enterprise.  

More analysis of health spending plans 

• The overall health and social care budget for day-to-day (resource) spending is set to increase by just 0.2% in real terms in the coming year, 2026–27. After accounting for increases in planned transfers to councils to help pay for the National Living Wage for social care workers, the amount for other health and social care services is currently set to fall by 0.6% in real terms.

• The overall health and social care resource budget is to return to more substantial growth in 2027–28 and 2028–29, increasing by an average of 2.4% a year in real terms. But the budget for NHS territorial and national health boards – which fund hospitals and ambulance services, among other things – is set to increase by just 0.4% a year in real terms over this period. The remaining parts of the health and social care budget are set to increase by far more – almost 12% a year in real terms. This ‘other' health and social care budget covers things such as primary care (GPs) and social care. No detail is provided on how spending would be divided between these other services. But still it is clear that, if delivered, this would represent a major shift in health spending from hospitals to the community.  

• The risk is that such a shift is infeasible. Underpinning the plans are efficiency savings targets for the NHS boards of 3% a year – significantly in excess of what the NHS has been able to deliver historically, and with little detail so far on how they are expected to be achieved. Without heroic improvements in efficiency or significant reductions in patient demand, NHS board budgets will need substantial top-ups to avoid deterioration in performance. This could stymie efforts to shift funding to community health and social care – or necessitate even steeper cuts to areas such as local government and justice funding. The average cut outside health and social care is already set to be 1.7% a year in real terms in 2027–28 and 2028–29. 

More analysis of capital investment plans 

• Investment spending is set to by 3% higher in real terms in 2026–27 than in the current fiscal year. The Justice & Home Affairs portfolio will see by far the biggest increase (24% in real terms) as spending on new prisons continues to ramp up. Transport investment is also set to see a large increase, of 11% in real terms. But the Health & Social Care and Finance & Local Government portfolios are set to see cuts to investment spending of 10% and 9% in real terms, respectively, compared with this fiscal year.  

• From 2027–28 onwards, the pattern is set to change significantly. The Justice & Home Affairs portfolio is set to see reductions in investment spending averaging 31% a year as the prisons construction programme winds down. The Scottish Government will channel more of its investment budget instead to investment in new social housing and transport infrastructure.  

• Planned health and social care investment spending is set to fall again in real terms though (2% a year, on average). This could make it difficult to invest in the facilities, equipment and technology that could help deliver the aforementioned ambitious efficiency improvements that the Scottish NHS is targeting. The UK government is, instead, planning small real-terms increases in its health investment spending (just under 1% a year). 

• As well as using funding from the UK government and devolved taxes, the Scottish Government can borrow up to around £500 million a year to help fund investment. So far it has borrowed via the UK government, but from the coming fiscal year, 2026–27, it plans to start borrowing directly from financial markets by issuing its own bonds. The Scottish Government's central assumption is that the overall cost of borrowing £3 billion over a 10-year period using its own bonds would be around £100 million higher than borrowing via the UK government – although this is subject to significant uncertainty. But its independent Investor Panel has advised that the creation of a Scottish bond market could help engagement with investors and boost investment and growth. The Scottish Government estimates that a boost to annual business investment of 0.1–0.2% would be sufficient to cover the modestly higher borrowing costs it expects. 

• The Scottish Government is also exploring public–private partnerships, where the private sector funds up-front investment costs and the government repays these over time via service charges for the use and maintenance of facilities. This ‘Mutual Investment Model' can help speed up investment in certain types of facilities, such as new community health centres. But it is the latest in a long line of approaches (such as the Private Finance Initiative) primarily designed to keep up-front investment costs out of government spending figures, and so bypass fiscal rules. And the official appraisal of the model says investments funded this way can cost up to 60% more in the long term than if funded via traditional borrowing (which is subject to limits in Scotland). This approach is therefore only appropriate if there are enough high-impact investments to justify incurring these higher costs.  

Martin Brogaard, a Research Economist at IFS and a co-author of the report, said: 

‘The Scottish Government faces a difficult funding outlook, which necessitates tricky trade-offs between different areas of both day-to-day spending and investment spending. 

‘For day-to-day spending, it is banking on big improvements in hospital and ambulance service productivity and a shift in resources to some combination of primary and social care to refocus on preventing ill health, enable health funding to stretch further and avoid a deterioration in service quality. Even then, many other areas such as local government and justice will see cuts in their funding from 2027–28. 

‘For investment, the trade-offs will be eased somewhat by the winding up of the prisons construction programme. The Scottish Government is understandably exploring how private capital can help it deliver public investments more quickly – but it should avoid locking itself or councils into too many potentially costly long-term commitments.' 

Sandy Begbie, Chief Executive of Scottish Financial Enterprise, said: 

‘The IFS analysis highlights the challenges that exist in the public finances, as well as the long-term problems the next government will face. Against this backdrop, it is vital to focus on tackling public sector inefficiency and increasing underling tax bases, which can generate revenue without increasing tax rates. The only way to do that is by delivering sustainable and significant economic growth.  

‘The last year has seen a range of government reviews and strategies for both efficiency and growth. It is critical that whoever is in power after the upcoming elections adopts a laser-like focus on turning warm words into concrete action and progress.' 

ENDS

Notes to Editor

The IFS Scottish Budget Report 2026–27 is an IFS publication by Bee Boileau, Martin Brogaard and David Phillips