UK Budget improved Scottish funding, but tough choices remain, says IFS

The UK Budget has improved Scotland’s funding outlook, however an Institute for Fiscal Studies (IFS) report has said tough choices will still need to be made further down the line.  

The report said the extra £1.5bn day-to-day resource funding had significantly improved the short-term funding outlook for the Scottish Government, amidst uncertain forecasts for devolved tax revenues and income from ScotWind windfarm licences.  

If the government were to spend all the extra £1.5bn this year it would be able to increase spending in that area by 4.9 per cent.   

But the IFS has suggested it “would be a wise move” for the Scottish Government to carry half of the resource funding forward, which would allow it to use the rest of the funds to increase public service spending by 3.1 per cent.  

It cites the “front-loaded nature” of top-ups to resource funding implied by the UK Budget, which means year-on-year increases to Scottish Government funding is set to be much smaller, resulting in tougher choices over what services to prioritise in Scottish Budgets.  

Currently, planned public service resource spending is set to be 0.6 per cent lower in real terms in 2024–25 than in the current financial year.

The IFS has also warned the Scottish Government against spending all of the allocated capital funding this year.

The Scottish Government is set to benefit from a big increase in 2025-26, but the three years following will see little change. 

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 £1.5bn 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 £1.4bn 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 one per cent 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.”

Commenting on the IFS report, Lib Dem economy spokesperson Willie Rennie said: “There is no doubt that the recent UK budget gives the Scottish Government more options.

“Previously major cuts were on the table because the SNP had governed poorly and failed to grow the economy. The SNP also made many election promises that they could not afford.

“Now the government have big choices to make with crises in many parts of the public sector. They must not duck these hard choices.

“Scottish Liberal Democrats will encourage the government to use the forthcoming budget to invest in areas like mental health and long Covid which are preventing people from getting back to work.”