What to look out for in the Scottish Budget?

When will the finance secretary deliver the budget? 

Shona Robison will deliver the Scottish budget on 13 January. This is later than the Scottish Government usually publishes its draft budget, which is usually in December.  

The government decided to delay the decision due to the chancellor’s Autumn Statement, which is typically made in October, being announced on 26 November. This left Scottish ministers and civil servants with little time to analyse the UK Government’s fiscal decisions and understand how they may impact what can be done north of the border.   

What was in Rachel Reeves’ Autumn Statement? 

The overall message from the chancellor was that the country’s finances are not in a healthy state, and that her budget aimed to create more stability by sticking to fiscal rules and avoiding borrowing.  

Significantly, there were no major funding settlements for local government and no shift to multi-year budgets – something the Scottish Government has stated it would like to introduce.  

Despite reports and hints from Reeves in interviews in the lead-up to the statement, income tax was not increased. Tax plans largely remained the same, but she did pull several decisions to raise revenue and shape behaviour.  

National Insurance and income tax thresholds were frozen for an extra three years beyond 2028, which will bring more people into higher bands over time. This is known as fiscal drag, a method of increasing tax revenue as inflation and rising wages push people into higher tax brackets or make them pay tax for the first time as thresholds remain the same.   

She also introduced a tax on salary sacrifices, which help people avoid National Insurance payments on pension contributions. From 2029, a cap of £2,000 a year will be introduced.  

With corporation tax remaining the same and only some small changes elsewhere for businesses, it’s an approach that the chancellor will hope will quietly raise money for the UK’s coffers while giving businesses and investors stability.   

Another headline announcement was the lifting of the two-child cap from April. This policy has limited child tax credits and Universal Credit payments to the first two children in a family, meaning any third or subsequent child born after April 2017 was not eligible for additional support. It is estimated that the decision will cost the UK Government £3bn by 2029-30.  

What is the block grant? 

This is the main source of funding the Scottish Government receives from the UK Government to pay for devolved areas, such as health, education, local government, and transport. It is determined by the Barnett formula, which adjusts Scotland’s pot of money based on changes in spending south of the border, and is split into funding for day-to-day public services and capital funding for infrastructure and long-term investment.   

The calculation considers Scotland’s population as well as other key factors. However, it’s not the only source of funding for the Scottish budget – the government can also raise revenue through devolved taxes.  

How could recent decisions by Westminster impact the Scottish Government’s fiscal plans? 

According to the Fraser of Allander Institute (FAI), following the UK Government’s Spending Review in June, the block grant that Scotland is due to receive from Westminster is estimated to be around £49.8bn – an increase from last year, which was £48.1bn. While on paper this increase looks significant, once it has been adjusted for inflation the real terms growth is smaller – roughly 0.8 per cent, according to the FAI.  

The Scottish Government claims that it has been “short-changed by more than a billion pounds”, but the FAI says: “It's unclear how this was arrived at – even if one accepted the premise that it’s on the basis of what average growth is for UK Government departments.”  

As well as the block grant projections from the summer, the UK Government says that because of decisions made in the Autumn Statement an extra £820m in Barnett consequentials will be available to the Scottish Government “to spend on its priorities such as education and tackling NHS waiting times”.  

The move to lift the two-child cap will also free up £155m in Scottish Government cash, which was already allocated to mitigate the cap ahead of setting its own budget in January.  

How did the finance secretary react to the statement? 

Robison said the UK Budget was “chaotic” and “fails to deliver” for Scotland and will not move the dial on the cost of living for squeezed households.  

She said: “We needed a step change from the UK Government with investment in public services, support for jobs and industry in Scotland and serious action on energy bills.   

“Instead, we got a chaotic mess, and the increase in funding for the Scottish Government will not even cover half the cost of the employer’s national insurance contributions brought in this year.”  

What can we expect from the Scottish budget? 

While much of what can be expected is mere speculation at this stage, according to the Scottish Spending Review Framework published in June the four areas the Scottish Government will be focusing on are child poverty, climate change, economic growth, and ensuring high-quality and sustainable public services.   

Robison is keen to introduce multi-year funding for local government. In January, she said the decision would only be possible once the Scottish Government had sight of the UK Government’s spending review, which, when published in June, said it had begun developing its own multi-year spending plans.    

In response to the publication, Robison said: “These conclusions will supplement the annual budget, and we intend to set out the Scottish Government's indicative spending plans for 2027-28 and 2028-29 for resource, with an additional year (2029-30) for capital.”    

If Robison delivers on multi-year settlements, it will mark a significant step toward giving councils the financial certainty needed to plan strategically, invest in long-term reforms, and deliver better services for communities – something that was unanimously agreed would be necessary to improve public services, according the chief executives of Scotland’s 32 local authorities that gave evidence at the Local Government, Housing and Planning Committee’s inquiry into barriers that could impact public service reform.  

With Scots who earn more than £30,318 already paying more income tax than a taxpayer in the rest of the UK, it will come as a comfort that Robison confirmed following the Autumn Statement that the government will not increase income tax rates or introduce new bands in next year's budget.  

However, it is worth noting that by not adding new tax thresholds, it would pull more Scots into higher tax bands as wages increase in line with inflation, meaning some people would pay more tax in the years to come.  

The first minister has said the extra money that has been freed up from the UK Government’s decision to lift the two-child cap will be spent in other ways to help alleviate child poverty.