Scottish ministers must be more transparent about public sector pay – or risk more spending cuts

Mid-August is normally quite quiet for political news, and instead is dominated by the kids going back to school… and, of course (for us at the Institute anyway) the Government Expenditure and Revenue Scotland (Gers) report.

This annual statistical publication estimates the money raised in taxes and other revenues, and compares it to the amount spent on services, which gives us Scotland’s net fiscal balance, or notional “deficit”. Gers Day in the Institute is very busy, and Wednesday was no exception. However, most of the questions were not about Gers at all, but rather about a leaked letter from the finance secretary to the Scottish Cabinet.

This letter, covered in an exclusive in The Times, also dominated the press conference to launch Gers, so that featured the finance secretary answering questions not about notional deficits – but rather about actual ones emerging in the Scottish Government’s spending plans.

It was a curious time for this to be revealed. Certainly, it diverted attention from the Gers figures – as the budgetary issues facing the Scottish Government are much more immediately consequential.

Not publishing a public sector pay policy essentially means that they [government] were not being transparent about what was being assumed

Shona Robison’s letter to cabinet colleagues sets out there must be a freeze on discretionary spending, with spending only going ahead if it is required to meet legal or contractual obligations. There will also be a recruitment freeze for all but essential posts. When questioned about the letter on Wednesday, the finance secretary said that these spending controls were necessary to meet the likely levels of public sector pay deals to avoid industrial action.

When Rachel Reeves presented her spending audit a few weeks ago, it included the decision by the new UK Government to accept the recommendations of the independent public sector pay review bodies. Crucially, though, from the Scottish Government point of view, the chancellor made it clear that some of the pay increases (approximately a third) would have to be met within current departmental budgets.

This will impact the amount of money that is generated for the Scottish Government’s budget through Barnett consequentials, and this is what the finance secretary has said has prompted these controls. But should this have come as a surprise?

Taking a step back from the announcements this week, we have had a volatile few years for the budgeting process overseen by the Scottish Government. For two years in a row before this year, we have had Emergency Budget Reviews to curtail in-year spending, generally because inflation was higher than expected, leading to higher costs and higher-than-budgeted-for pay deals.

Last year in May, the Scottish Government published its Medium Term Financial Strategy, which showed a large gap in 2024-25 between the commitments the government has compared to the resources available to the Scottish Government. This was followed by an emergency budget review in the autumn, which delayed lots of spending in 2023-24 into 2024-25. We said at the time that this was likely to exacerbate the 2024-25 position, so the Scottish Government would have difficult decisions to make at the budget in December 2023.

Cancelling spending in-year... will undoubtably lead to those things that can be cancelled being stopped, rather than the spending which has the least impact on the outcomes for citizens

At that budget, the Scottish Government said they could not publish a public sector pay deal, as would have been normal, due to uncertainty about funding.

Let’s think about this for a moment. The public sector pay bill in Scotland is around £24bn in the last year, which is around half of the roughly £50bn Scottish budget. In order to put any sort of budget together, the Scottish Government must have assumed something about how public sector pay would change in 2024-25.

So, not publishing a public sector pay policy essentially means that they were not being transparent about what was being assumed, perhaps because it would have been obvious to many that it was unlikely that it would be sufficient to avoid industrial action.

The pay policy was eventually published on 30 May 2024, with an effective 2.3 per cent increase for the full year – although this is for central government and includes no provision for uplifts for local government. Given the lack of transparency, we’re not sure if the pay policy is in line with the assumptions made at the budget. We have seen already that more money has had to be found to fund increases for refuse workers in local government to avoid industrial action.

The four and five per cent pay deals for different workers in the public sector in England are likely to put pressure on the Scottish Government to match them, and it is these announcements that ministers are pointing to which may put greater than expected pressure on their budget.

However, we could have had greater transparency and therefore a meaningful discussion about public sector pay at the time of the Scottish draft budget in December. Perhaps this would have led to a more strategic approach to spending that would need to be paused or cancelled, rather than the situation we are in for the third year in a row of cancelling spending in-year. Which will undoubtably lead to those things that can be cancelled being stopped, rather than the spending which has the least impact on the outcomes for citizens.

Clearly, difficult decisions will be required at the Scottish budget later this year. But much more transparency is also required from the Scottish Government to ensure a debate about the budget can be well informed.

Professor Mairi Spowage is director of the Fraser of Allander Institute.