The next Scottish government will need to make “really difficult” spending decisions soon after taking power, including addressing its large public sector pay bill, according to senior economists at the Fraser of Allander Institute (FAI) at the University of Strathclyde. The economists believe that manifestos published by Scotland’s political parties during the campaign failed to inform voters about the true scale of the fiscal challenge.
Economists Warn of ‘Fiscal Denial’
Professor Mairi Spowage, director of the FAI, stated that the next government would need to have a “reckoning” after the 7 May election because the previous Scottish National Party (SNP) administration consistently spent more money than it received from its core funding sources. She noted that the government had heavily relied on non-recurring windfalls, such as fees from the ScotWind offshore wind licensing round or one-off payments from the Treasury, to fund higher spending.
Spowage emphasized that the next government would face the most challenging budget since the Scottish parliament was founded in 1999, and may need to cut this year’s spending to cope with the shortfall. “The parties have engaged in a collective bout of fiscal denial with manifestos which have lots of commitments, yes, some ways to save money, but any money that is saved is then spent immediately,” she said at a recent briefing for economists. “We can’t go on as we are, never mind spend more money.”
Spending Growth Outpaces Income
The FAI’s analysis shows that, on average, Scottish public spending has grown in real terms by 3.9% per year since 2019. However, income from taxes, the UK government’s annual grant, and one-off sums from energy levies grew by only 3.6% per year. Scottish spending has also grown “significantly” faster than the UK’s, which was limited to 3% per year on average over the same period. The FAI attributed this partly to the SNP government breaching its policies on public sector pay.
Last year, the Scottish government estimated it faced a £5 billion gap between spending commitments and income by the end of this decade. SNP ministers published a revised spending strategy in January, which they said would address much of that overspend. The Scottish Fiscal Commission, the official watchdog, forecasts that spending for day-to-day Scottish services will rise by only 1% per year over the next five years.
IFS Echoes Concerns
The FAI’s analysis echoes the view of the Institute for Fiscal Studies (IFS), which stated on Monday that none of the parties’ plans were “fiscally credible.” David Phillips, the IFS’s lead on devolved government finances, said every party displayed a “lack of realism regarding just how tough the fiscal challenges facing the next Scottish government are.”
João Sousa, the FAI’s deputy director, noted that the previous Scottish government had trimmed its spending plans in January to partially address funding gaps, but there were still a number of “unexploded traps” awaiting the next administration. These include meeting the costs of public sector pay growth, future health and social care cost increases, and funding Scotland’s rising social security bill, which is forecast to be £1.2 billion higher than its share of UK welfare spending by 2031.
Public Sector Pay Challenges
The Scottish government spends nearly half of its £59 billion annual budget on pay, including for council refuse workers, doctors, nurses, and teachers. Two years ago, it set a public sector pay policy to cap pay rises at 9% over three years, with no year exceeding 3%. However, actual pay deals, using collective bargaining with public sector unions, consumed 8% of that within two years. Sousa said that the 9% cap would have to be breached next year if public sector pay were to keep pace with inflation. As these wage increases are recurring costs, every future government would have to continue funding them unless there are cuts in public sector employment.
Scottish ministers have said they can save £1.5 billion through efficiency savings and reducing the public sector workforce, primarily by natural wastage. Sousa argued that this approach lacks credibility and that ministers could “only paper over things for so long.”
Parties’ Promises on Income Tax
All major parties in this election – the SNP, Labour, and the Conservatives – have promised voters they will not raise income tax, and some have expressed aspirations to cut income tax or simplify the system once government finances allow.
Professors Graeme Roy and Anton Muscatelli of Glasgow University, and Professor Stuart McIntyre of Strathclyde University, three of Scotland’s leading economists, stated that the next government’s “overarching challenge will be economic and fiscal.” Writing in the Economics Observatory journal, they said: “Slow growth in living standards, an ageing population and rising spending pressures mean that the next parliament will face difficult budgetary choices. A prolonged conflict in the Middle East may make that position even more challenging, particularly if the UK overall becomes even more constrained fiscally.”
