It was a Scottish Budget where what was left unsaid was just as consequential as what Shona Robison mentioned in her 30-minute statement to the Scottish Parliament (writes the staff team at FRASER of ALLANDER INSTITUTE).
The Scottish Government will be hoping for many of the headlines to focus on the mitigation of the effect of the two-child limit from 2026-27. The Finance Secretary left this until last in the order to ensure maximum impact.
A very political announcement, then, given the timing of the election, and one that has no money attached to it (as far as we can tell) in the 2025-26 financial year – the year this Budget actually refers to. See more on this below.
There were also significant announcements on health spending, which is forecast to rise by 3.6% in real terms – significant growth, although as we have said frequently, how and where it is spent matters just as much as the envelope. There were also increases to the affordable housing supply programme, which was cut by a quarter last year but is now just only 2.5% below 2023-24 in real terms.
At this point, we must welcome the change in presentation of the Scottish Government’s plans, which are now compared with their best estimate of the position for the current financial year. This has helped us meaningfully scrutinise plans, although some wrinkles remain to be ironed out such as in-year transfers to local government, and which we hope will be baselined in future.
Two-child limit
The biggest surprise in the budget (although social media had got wind of it slightly ahead of time) was the promise to ‘mitigate, as far as possible, the impacts of the two-child limit from 2026.’
This was clearly a last-minute addition to the budget. The Scottish Fiscal Commission (SFC) stated they received it too late to add to their figures, and too late for any analysis to be included in the budget document itself or the Equality and Fairer Scotland Budget Statement. This lack of detail is troubling given the potential cost of funding this is likely to be in the region of £200m. There are far too many unknowns to say anything conclusive about impact, but there is no doubt that it would boost efforts towards the statutory child poverty targets (albeit not by nearly enough to meet them by just doing this alone).
How will the Scottish Government fund this? Well, they may be hoping that they won’t have to, and the UK Government will announce the abolition of the policy UK wide (which is widely expected to happen at some point) before the Scottish Government have to put their hands in their pocket.
Whilst early 2026 is their target date, this was heavily caveated in the statement as being dependent on the UK Government giving the Scottish Government the data to allow them to operationalise it. Given recent experience of rolling out the Scottish Child Payment, which took years, there are plenty of reasons why this may take longer than those target timescales set out. Yet in the meantime, the Scottish Government can take the moral high ground.
Relief for hospitality businesses
The Finance Secretary announced a 40% relief for small hospitality businesses that at first glance could appear very similar to the 40% relief offered by Rachel Reeves for retail, hospitality and leisure (RHL) businesses. However, it is a much more limited measure than the one offered in England – just for hospitality only, and only for those businesses who are “small” i.e. have a rateable value of less than £51,000.
To give a sense of scale, the SFC have estimated that this relief will cost £22m: far short of the Barnett funding generated by the measure in England of £147m.
ScotWind funding (partially) restored
Early in her statement, the Finance Secretary announced that some of the ScotWind funding that had been drawn down to fill gaps in spending in the statement in September has not been used for day-to-day spending, and instead will be retained for capital spending in 2025-26 – “for exactly the kind of long-term investment it should be spent on.”
ScotWind monies are revenues generated from the sale of offshore wind licences to energy companies. As they are one-off windfall payments from the exploitation of Scotland’s resources, they should really be used to invest in infrastructure to ensure that Scotland’s economy benefits on an ongoing basis from this sale. In particular, it should be focussed on capital spending that helps with the energy transition.
However, it is still the case that some of this fund has been used to plug gaps in day-to-day spending, even if some of the money has now been returned. The Scottish Government has used £160 million for resource funding in 2024-25. Now, in 2025-26, the Scottish Government plans to use ScotWind mostly to support £326 million of capital spending, with £10 million still used for resource.
This leaves a remaining balance of £219 million to support capital or resource spending in future years. Here’s hoping it is explicitly set aside for investment spending.
Lessons learned?
A surprising decision was to not account for the certain increase in employment costs due to the employer National Insurance Contributions that will come into effect on 1 April. As we mentioned in the last few days, we expect this will cost around £500m, and it will be an ongoing cost as the increase is permanent.
The Scottish Government doesn’t yet have confirmation as to how much they will receive from the Treasury in compensation, but any of the figures discussed in the media will be below that amount – perhaps around £300m. This means that the Scottish Government has a £200m shortfall in funding – perhaps more if it decides to compensate arms-length organisations providing public services.
What we have learned from the SFC’s documents, however, is that this shortfall remains unaccounted for in the Scottish Government’s budgeting. This is an extremely risky approach, and one which sets up a possible need for further emergency measures during the course of the next financial year – leaving us wondering whether any lessons have been learned from going into a new year without fully setting aside budget cover for what are known costs, as highlighted by the recent Audit Scotland report.
Beyond next year, there are some difficult news on the income tax forecast as well. The Scottish Government is looking at a £700m negative reconciliation in 2027-28, largely due to a much larger deduction to the block grant related to 2024-25 than that which was built into that year’s budget. This is still an early forecast, and much might change until then – reconciliations have changed significantly in the past. But if it comes to pass, it’ll be at a point when growth in funding for public services will be slowing– meaning that difficult decisions have been kicked into the future rather than planned for.
IMPROVING NHS, SCRAPPING TWO CHILD CAP AND DELIVERING UNIVERSAL WINTER SUPPORT
The SNP Government’s Budget will deliver progress for Scotland, by Scotland – after listening carefully to the people of Scotland and taking action on their concerns.
SNP MSP for Edinburgh Pentlands Gordon Macdonald highlighted key SNP policies which will be taken forward in the Budget which will benefit people in Edinburgh including:
· Record levels of NHS funding – throwing the weight of the government behind NHS improvement
· Reintroducing universal winter heating payments for pensioners after they were axed by the UK Labour Government
· Scrapping Labour’s Two Child Cap – lifting 15,000 children out of poverty
· Increased investment in housing, supporting the delivery of 8,000 homes
· Delivering a fair tax system – meaning the majority of people in Scotland pay less tax than in the rest of the UK
Commenting Gordon said: “I am delighted at the support John Swinney’s first Budget is offering for people in Edinburgh. It will deliver real progress on people’s priorities – and will offer hope, putting in place the investment for Scotland to in the future.
“The First Minister has listened to what people have told him on the NHS – that’s why he is investing record amounts and throwing the whole weight of the government behind improving the health service, making it easier for people in Edinburgh to see their GP, bringing down waiting times, and funding the replacement of the Eye Pavilion in Edinburgh.
“People across Edinburgh have been let down by the UK Labour Government. While the UK Government’s Budget treated Scotland as an afterthought – this is a Budget that puts the people of Scotland first.
“While they cut winter fuel payments, the SNP is introducing universal support, while they push kids in Edinburgh into poverty with the cruel two-child cap, the SNP will scrap it and give thousands of kids a better chance in life.
“All this is being achieved while delivering the fairest tax system in the UK – with the majority of people in Scotland paying less tax than south of the border.
“This SNP Government have and will continue to listen to people’s concerns and take strong, decisive action to deliver on their priorities.”