Scottish Government must find extra £720m amid already ‘challenging’ fiscal outlook

The Scottish Government must set out its spending plans, the Scottish Fiscal Commission has said, after it forecast a “challenging” outlook.

The official forecaster has said that while the financial position for this year is slightly improved owing to decisions on additional support needs funding south of the border, the outlook for 2027-28 and beyond will be more difficult.

It also confirmed the government will need to find an additional £720m due to income tax reconciliation – a correction made to bridge the difference between forecast and actual revenues from income tax.

Public finance minister Hannah Mary Goodlad has said the government was taking a “responsible approach” and any future decisions would be “sustainable”. 

The forecaster, which has published this update ahead of parliament returning next week, said current forecasts for day-to-day spending could fall due to high inflation. Meanwhile capital budget forecasts are also due to fall.

SFC chair Professor Graeme Roy said this made the outlook “exceptionally difficult and really quite challenging” for ministers, even before the income tax reconciliation was taken into account.

Roy said: “Although funding has increased for 2026-27, the Scottish Government continues to face significant challenges in balancing future budgets.

“The delivery of planned savings, managing workforce costs, and the impact of the upcoming UK Budget will all be important factors in determining the funding available for public services in Scotland.

“Transparency on the delivery of planned efficiencies and the scale of emerging pressures will help parliament and the public understand the choices that lie ahead.”

The SFC also highlighted the failure of the government to meet its target to reduce the size of the public sector workforce by 0.5 per year. Last year, the number of full-time equivalent employees increased – which means larger reductions will be required going forward.

It said that, ahead of the next Scottish Budget, ministers should “set out progress on the planned efficiencies, developments on public sector pay and workforce, and how the spending pressures it faces have changed” to enable parliament to properly scrutinise its plans.

However, it also acknowledged that any changes made at UK level by the new prime minister will impact Scottish Government funding significantly – and these won’t be confirmed until the UK Budget in late October.

Goodlad said: “Through progressive taxation and careful stewardship of the public finances, we are protecting those who are most vulnerable to these pressures and Scotland continues to provide the most comprehensive package of cost-of-living support in the UK.

“These are deliberate choices, but we are equally clear that they do not come at the expense of ensuring that public finances remain sustainable.”

Scottish Labour has accused the government of “keeping us in the dark about its plans”.

Finance spokesman Michael Marra said: “The SNP needs to start being honest with Scots about what it is planning to cut and set out a real plan to protect frontline services. The SNP’s low growth, low pay economy has blown a £888 million hole in the public finances and we need a long-term plan to kickstart growth and deliver quality jobs.”

Meanwhile the Scottish Conservatives said the SNP’s record on the economy was “increasingly alarming” and the Lib Dems said the update proved ministers were already “falling short” on public service reform plans.

The Institute for Fiscal Studies has warned that Finance Secretary Jenny Gilruth will be forced to make cuts to spending due to the “stormier outlook”. Senior economic João Sousa said: “The SFC’s analysis points towards a stormier outlook for future years, and a particularly tough set of choices for the new Finance Secretary Jenny Gilruth in her first Budget covering the 2027–28 financial year. 

“With overall funding set to fall compared to 2026–27, if Ms Gilruth wants to protect the NHS from cuts, she will need to make even bigger cuts to spending on other services.”