In many respects, the broad contours of the fiscal challenge facing Scotland’s new government are well known. Our newly elected MSPs will enter the parliamentary term with a Scottish Budget under increasing pressure from demographic change, rising social security spending, weak growth in living standards and growing demands on public services.
In its Medium-Term Financial Strategy published last year, the then-Scottish Government projected that, if existing trends continued, spending pressures would exceed funding by £2.6 billion on day-to-day spending and £2.1 billion on capital spending by 2029-30. Their January 2026 Spending Review sought to address part of this challenge through planned efficiencies and reforms, including £1.5 billion of savings over the next three years.
Delivering these savings will not be straightforward – particularly where they rely upon workforce restraint and long-term service redesign, and come at a time when the economic backdrop, including higher inflation, is increasingly difficult.
The challenge for the government is therefore unlikely to be whether difficult fiscal choices emerge, but when and how they might emerge. What factors will determine when we hear from the government on its new fiscal plans?
I think we should be cautious about expecting any immediate dramatic change.
First, the previous administration only recently set out a Budget and Spending Review covering the early years of the new Parliament. As in the past, an incumbent government will typically take time to assess progress on the delivery of pre-existing plans before, for example, reopening major spending decisions.
Second, the fiscal framework and agreement between the Scottish and UK governments constrains the timing of tax changes. In practice, major devolved tax policy decisions cannot take effect until 2027-28. That means that, even if there were an appetite for tax reform or raising more funding, such as changes to income tax, the practical timetable for implementation would be more gradual.
Third, uncertainty around inflation remains important. Public sector pay is one of the central pressures within the Scottish Budget. The devolved public sector pay bill accounts for around 55 per cent of day-to-day spending. In recent years, pay settlements have exceeded earlier policy assumptions, meaning that maintaining current spending plans requires relatively modest future settlements. Whether this proves achievable (or is advisable) – in a world of higher inflation – will be an important consideration for the government as it looks to set out plans for the next few years.
Fourth, the UK fiscal position continues to matter significantly for the Scottish Budget. We will have a UK Budget in the autumn. This will determine the extent of any additional Barnett consequentials and will shape the overall funding envelope available to the Scottish Government. Decisions taken by the UK Government on welfare, taxation and departmental spending will all have direct implications for the Scottish Budget through the operation of the fiscal framework.
For these reasons, do not be surprised if the initial phase of the new Parliament focuses less on immediate spending or tax changes and more on setting strategic fiscal direction. The government will be required to publish a Budget for 2027-28, but not until the turn of the year and after the UK Budget in the autumn. In the short term, attention may instead turn toward legislative priorities, economic strategy and reflections on medium-term fiscal plans. One would also hope for an update on Spending Review plans and the associated efficiencies that underpin them.
The Scottish Parliament’s Finance and Public Administration Committee’s Legacy Report argued strongly for improved medium-term financial planning, clearer prioritisation and greater transparency around fiscal choices. Ultimately, and as the Scottish Fiscal Commission has highlighted, the core issue facing the next Scottish Government is that many of the principal drivers of spending – health, social security, pay, climate investment, and demographic change – place upward pressure on the Budget at a time when funding is constrained.
That does not imply that there are no policy choices available. But it does mean that the next phase of policy debate is likely to centre increasingly on prioritisation, affordability and reform. The central challenge for the new government is not simply identifying additional commitments but demonstrating how they can be delivered sustainably within the fiscal constraints that it will face over the coming parliamentary term. The fiscal environment facing the next Parliament is likely to leave less room for policymakers to promise higher spending and improved public service performance without difficult choices elsewhere. The central policy challenge may therefore become not simply identifying priorities but deciding what government can no longer do in the same way as before.
