Scotland faces £2bn social security gap, official forecasts say

Scotland's social security funding gap will be around £2bn by the end of the decade, the Scottish Fiscal Commission (SFC) predicts.

Professor Graeme Roy, chair of the SFC, said: "The government have to find £2bn from somewhere in their budget in order to essentially pay for that, because the funding they're getting for it is not going to keep pace."

In its latest five-year economic and fiscal forecasts, the SFC said the total funding available to ministers in 2025-26 will be £59.6bn, which is around £0.8bn more than was thought in December.

The change is down to additional UK Government funding and the expected draw down of monies not spent in the last financial year.

But "significant" pressures remain on the Scottish budget, the SFC said, including public sector pay deals and higher employers' National Insurance (NI) contributions.

Pay agreements for nurses (4.25 per cent) and ScotRail staff (3.6 per cent) have been in excess of the government's three per cent policy, with other deals yet to be struck.

There will likely be increased pressure on negotiations as a result, the SFC said, with "a knock-on effect for wage costs in future years".

Meanwhile, UK ministers have provided £339m in additional funding to cover the NI hike, but this covers between half and two-thirds of the anticipated additional costs faced by the Scottish Government.

Available funding for day-to-day spending is expected to grow by 1.9 per cent in real terms in 2026-27, slow to one third of that the following year and return to 1.6 per cent over the final three years of the forecast.

Reduced social security spending in England and Wales is expected to cut £0.4bn from Barnett consequentials in 2029-30.

On top of existing Scottish Government welfare commitments, this means the spend on benefits will be £2bn more than the associated funding.

Spending on devolved social security benefits is expected to hit £9.4bn in 2030–31.

The removal of peak-time rail fares gives ministers more costs to meet, the SFC said, and while the full costs of that policy have not yet been set out, they could reach £40m per annum.

Income tax is expected to generate £180m less than was suggested in December, a position related to changes in the block grant adjustment.

If Scotland had the same tax regime as the rest of the UK, the income could be £1m higher, it is claimed, with the "economic performance gap" partly due to slower aggregate earnings and employment growth.

The forecasts come a fortnight before the UK Government delivers its spending review, and one month ahead of the publication of the Scottish Government's delayed Medium-Term Financial Strategy.

Roy said: "We need to wait until later in June to see the Scottish Government’s spending and funding plans, but what we do know now is that while budgets have improved slightly this year, spending pressures are also increasing with public sector pay, social security and other commitments.

"There are also longer term pressures in key areas like health and social care as a result of our ageing population, and the challenge of meeting net zero obligations that I have discussed in earlier reports."

Tory MSP Craig Hoy called the findings "damning", saying "the SNP's financial incompetence and anti-business policies" mean Scotland is "lagging behind" while public spending is "ballooning".

David Phillips of the Institute for Fiscal Studies said: "The forthcoming Medium-Term Financial Strategy is a chance for the Scottish Government to set out how it will address the difficult financial outlook and make trade-offs between tax and spending in different areas.

"With devolved elections next May, there may be a temptation to delay difficult decisions. But doing so would shorten the time to address the challenges facing any future Scottish Government."

Finance secretary Shona Robison said the Scottish social security regime is "providing vital assistance to enable older people to heat their homes, help disabled people to live independent lives and keep thousands of children out of poverty".

She said: "Our investment in this area over and above the money we get from the UK Government is projected to be less than 3.5 per cent of the total Scottish Government resource budget by 2029-30.

"The UK Spending Review will confirm our block grant funding for the years ahead which, along with these forecasts, will inform the Scottish Government’s Medium-Term Financial Strategy and accompanying Fiscal Sustainability Delivery Plan."