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Spending on health and net-zero could squeeze future budget, economists warn

The Scottish Government could be forced to make cuts of 13% to public services in the next four years if it wants to boost spending on the health service and net-zero policies, a leading financial think tank has said.

An analysis by the Institute for Fiscal Studies (IFS) has compounded worries of funding issues in Edinburgh, saying future non-benefit spending could be “tight”.

While there is an expected increase in available funding based on the projections from the Scottish Government in its review in May as a result of higher tax receipts and UK Government funding, the budget is still likely to be 1.6% less in real terms in 2023-24 compared to this year, when in-year top-ups are taken into account.

When major one-off costs such as council tax rebates are taken into account, the IFS said, the fall will reduce to 0.8%.

Projections from the Scottish Fiscal Commission (SFC) suggest funding will fall by 1.6% in 2024-25 and grow “modestly” in the subsequent three years.

John Swinney
Deputy First Minister John Swinney set out the Scottish Government’s budget last month (Andrew Cowan/Scottish Parliament/PA)

The 13% figure was arrived at by assuming that spending for health and social care and net-zero policies will rise at the same rate between this year and next year – 2.9% and 4% respectively – up to the 2027-28 financial year.

The report found £2.7 billion would have to be raised to return the funding to 2023-24 levels – the equivalent of an increase of 4-5p on income tax rates.

“These cuts to overall funding would imply difficult trade-offs for the Scottish Government as it allocates funding between different services,” the think tank’s first Scottish budget report said.

Bee Boileau, a research economist from the IFS and one of the authors of the report, said: “Additional funding from the UK Government and a forecast boost to devolved tax revenues mean the outlook for funding has improved a little since last May’s resource spending review – but the picture is far from rosy.

“Official projections imply that funding non-benefit spending is set to fall over over the next two years and then grow slowly over the following three years.

“Indeed, it would still be close to 2% below 2022-23 levels in 2027-28, and that assumes a significant improvement in the performance of Scotland’s devolved income tax revenues – without that, this funding could be close to 5% lower than this year in 2027-28.

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“If either of these scenarios were borne out, the Scottish Government would likely need to make significant cuts to a range of public services.

“Further big increases in devolved tax rates would be one way to avoid such cuts.

“The Scottish Government will instead be hoping for additional funding from the UK Government – which may not be in vain as the UK Government would also need to make cuts to many services if it sticks to the plans for spending it has pencilled in.”

A Scottish Government spokesman said the analysis shows “the difficult choices faced as a result of a UK Government settlement that is not enough to meet the needs of public services in Scotland and fund a response to the cost-of-living crisis”.

He added: “Above all it highlights the urgent need for additional financial powers for Scotland, such as those which would come with independence,” but the Scottish Government will “continue to do all it can to manage public finances and any risks” within its powers.

“This year’s budget faces significant challenges and difficult decisions have been taken to focus on key priorities of eliminating child poverty, investing in public services and supporting the transition to net-zero.”