The origins of Scotland’s spending crisis

The surprise was the fact so many people were surprised. Last week Shona Robison, the finance secretary, announced “emergency control measures” intended to put a brake on all Scottish government spending that was not a legal obligation. New spending, of any sort, will only be permitted if it is “truly essential or unavoidable” as the government faces the grim prospect of being unable to meet its existing commitments.
Public services will not “crumble away” Robison said — a pledge that may not prove as reassuring as the finance secretary believes it — but she acknowledged that it is “going to be a really, really tough, tough year”.
SNP ministers blame the new Labour government for the financial strains under which Scotland must operate but, in truth, the pressure on budgets now evident north of the border has been building for some time. Some of this is the consequence of past decisions made by successive UK regimes; much of it is the consequence of the Scottish government’s own choices.
Moreover, although Robison attempted to pin the blame for Caledonian austerity on Rachel Reeves, the chancellor, last week also saw the publication of the latest Government Expenditure and Revenue Scotland figures. These showed that, in the 2023-24 financial year, public spending in Scotland — money spent by both governments — was £2,417 greater per capita than in the UK as a whole. In recent years spending on devolved services has typically been around 25 per cent higher per person in Scotland than in England.
Robison will outline the full extent of the planned cuts and cancelled programmes in a statement to parliament next month. Already she has announced a recruitment freeze across the public sector. Only openings in the most essential “blue light” jobs will be filled. Organisations will be expected to do more, with less.
The Scottish government’s ability to borrow money is largely restricted to capital expenditure. The day-to-day budget must, as a matter of law, be balanced. When spending outstrips revenue — from cash raised in Scotland and money allocated to Scotland by the block grant and the Barnett formula — a squeeze becomes inevitable. The Scottish government has ample discretionary powers but it must still operate within a spending “envelope” that is not entirely of its own making.
Thus when Reeves cut winter fuel payments for pensioners elsewhere in the UK, she also deprived Scotland of money it had earmarked for the now-devolved payment of winter fuel assistance. Robison could have found the £160 million needed to maintain the benefit as a universal payment but only at the cost of cuts elsewhere. As a result it will henceforth be means-tested in Scotland as elsewhere in the UK.
“Reeves took a pile of money out of the budget but we don’t know how much,” said one senior figure. “We won’t know until late October [the autumn statement is October 30] so we’re trying to guess and the civil service can’t sign off budgets on that basis. We have no options to raise money in-year so it has to be cuts.”
Despite the rhetoric attempting to shift the blame for the astringent management of public spending on to Labour ministers in London, there is also recognition at senior levels of the SNP that government is about choices and this is a period where tough decisions must be made.
“With the pay bill for salaries, wages and pensions accounting for more than half of the budget, and contractual and legal obligations for a significant additional chunk, what’s left will take a huge hit,” one source said.
“All the smaller things will be in trouble: anything funded on a yearly basis like charities, other things like promotional campaigns and marketing and conferences, travel and international travel, budgets in departments like culture and external affairs.”
The resource spending review, published in May 2022 when Kate Forbes was finance secretary, implicitly accepted that above-inflation public pay sector settlements could only be afforded if the number of people on the public payroll declined. Failing to control headcount would inevitably lead to financial pressures on spending elsewhere. Robison, who succeeded Forbes when Humza Yousaf became first minister, ignored the implications of that analysis.
The fact there are more public sector workers per head of population in Scotland means that even if workers on both sides of the border agree to the same terms and the Treasury fully funds the deal in England, that does not generate enough cash to cover all of Holyrood’s costs.
A crisis point emerged when, having budgeted for 3 per cent pay rises despite the fact more expensive deals were always likely to be struck, SNP ministers watched with growing alarm as the Labour government agreed to almost double that proportional increase. This means a significant portion of this funding will come through cuts to Whitehall departments ensuring Holyrood will not see the level of additional money that the nationalists would like to cover the costs. Although ministers have previously boasted that many public employees are better paid north of the border, they are braced for inflation-busting pay demands from trades unions.
The government is also chained to the consequences of its own previous choices. Years of council tax freezes have simultaneously starved local authorities and made them even more dependent on central funding, while policies such as free university tuition, the introduction of benefits such as the Scottish Child Payment, and legacy commitments to free personal care for the elderly each constrain the Scottish government’s room for budgetary manoeuvre. There is almost no “slack” in the system.
New welfare payments — and the administrative apparatus required to oversee them — are a “top-up” to existing benefits funded by the UK. The Scottish government is free to spend more if it chooses to but it must meet the cost of additional benefits from its own resources. In addition to the child payment, hundreds of millions of pounds of unfunded commitments have been promised to maintain more generous access to disability benefits.
João Sousa, deputy director of the Fraser of Allander Institute, said: “The effect over time [has been to create] a kind of dual-tier system where the health service has been much more protected than everything else.” Since the NHS is by far the largest item of expenditure in the Scottish budget, protecting it necessarily means wintry settlements for other departments.
Nor is it obvious that ministers will be able to compensate for spending cuts with further tax increases. The Scottish Fiscal Commission calculates that once behavioural effects are taken into account, last year’s increase to the highest rate of tax, paid by those earning more than £125,000 a year, may raise as little as £9 million.
Increases to income taxes for the wealthiest — those with the “broadest shoulders” in the government’s favoured parlance — were combined with a surprise decision to freeze council tax last year. “Watch for the reverse of that,” says one senior SNP figure. “There is no appetite for income tax increases but councils will be able to let council tax rip.”
Although a recruitment ban has been announced for all non-essential jobs in the public sector, there is little desire to drop the policy of no compulsory redundancies first adopted in 2007, even though there is widespread recognition that this policy, however well-intentioned, encourages over-staffing and inefficiency. As the government’s own review of its pay strategy concluded last year, “an unintended consequence of this commitment is that employers can find it difficult to reshape their organisations in line with delivery priorities and some continue to employ people they no longer need”.
James Mitchell, a professor of public policy at the University of Edinburgh, said: “This is no new problem. There have been numerous warnings for many years. The notion that we now have a sudden ‘emergency’ wilfully ignores the long-term nature of the problem and countless warnings.”
In 2010 an independent analysis of Scotland’s budget position commissioned by Swinney, the then finance secretary, and chaired by Crawford Beveridge, a former Scottish Enterprise chief executive, recommended that up to 60,000 public sector positions should be cut alongside across-the-board pay freezes “as the first essential step to constrain growth in the public sector pay bill”.
That, as SNP ministers note, was a review operating in a time of Conservative-led budget cuts at Westminster. Today’s pressures on public spending owe more to the bills run up during the Covid pandemic but the effect is, if anything, even more severe because “easy” savings have all already been made.
Jim Gallagher, a former adviser on devolution and constitutional issues to Gordon Brown, said that “as far as one can tell, the Scottish government have been patching and mending their budget, using one-off windfalls to meet recurring commitments; they appear to have run out of road”.
Senior government sources suggest that, painful as these cuts may be, it is more prudent in a political sense to grasp the opportunity for change in this financial year rather than wait for a still greater crisis to hit in the 12 months before the next Holyrood election in 2026. That, like many other budget-related beliefs, may yet prove to be wishful thinking.
“There has been a lack of long-term strategic thinking in spending decisions,” Mitchell said. “Decisions have been made to grab a headline — campaigning has swamped good governance.” He added: “There has been insufficient thought given to trade-offs and opportunity costs.”