Spending cuts and tax rises loom in ‘challenging period’ for ministers, with welfare bill set to top £9bn

Ministers will have to ramp up taxes or make spending cuts to fund Scotland’s burgeoning welfare bill and generous public sector pay deals, economic experts have warned.

The Scottish Fiscal Commission (SFC) said the Scottish Government faces a “really challenging period”, with spending on social security forecast to grow from just over £6.1bn in 2024-25 to more than £9.4bn by 2030-31.

With the rise coming at a time when the UK Government is trying to cut its own welfare bill, SFC chairman Professor Graeme Roy said Holyrood ministers will increasingly have to fund more of the spending for this from its own budget.

Prof Roy said: “The government have to find £2 billion either from taxation or other areas of spending to make the budget balance.”

He highlighted this “widening gap on social security” as one of the financial pressures the Scottish Government will have to face.

The Scottish Parliament building in Edinburgh | PA

Prof Roy also said ministers will likely “have to find additional resources” to pay for public sector pay, with awards being made to workers already higher than the level set in the Government’s public sector pay policy.

He said: “That means essentially money is going to have to be found from elsewhere in the budget in order to pay for pay awards coming in above the pay policy.”

‘Economic performance gap’

Meanwhile, an “economic performance gap” means the government is raising less from income tax than it would if Scotland’s economic performance matched that of the UK.

The SFC found that Scotland’s different policies on income tax should raise just over £1.67 billion this year, but its report said the “actual projected income tax net position in 2025-26 is £616 million”.

As a result, Prof Roy noted there was a “performance gap of about £1 billion”.

He added: “That is an additional £1 billion that is being foregone within the overall funding of the Scottish budget because of that relatively weaker economic performance.”

Prof Roy noted that overall the funding to the Scottish Government “continues to increase”.

Professor Graeme Roy | Contributed

But he said: “Once you take into consideration things like social security commitments, when you take into consideration pay awards running ahead of the pay policy, when you take into consideration things like the national insurance increase, and the general pressure we are seeing on public service delivery, while funding is going up the spending pressures are continuing to go up at the same time.

“So the government is continuing to work in a situation where they have really quite limited fiscal headroom to manage the pressures that they face.”He added: “Funding is going up, but once you start to look at some of the commitments the Government have made it is going to be a really challenging period for the short and medium term.”

Scottish Conservative finance spokesman Craig Hoy said: “This damning report shows an eye-watering £1 billion gap between what Scotland’s higher income tax rates might have added to the Scottish budget, and what they are actually projected to deliver.

“The ‘economic performance gap’ identified is entirely the result of SNP decisions on tax, business support and welfare spending.”

He added: “Scottish workers are being hammered by the highest taxes in the UK, but the SNP’s financial incompetence and anti-business policies mean we’re lagging behind.

“The SNP’s inability to get a grip on public spending, and their ballooning welfare bill, which experts warned is unsustainable and unaffordable, means that while Scots are paying more, they are getting less, as services are cut to fill the financial hole.”

Public finances ‘not a pretty picture’

Liberal Democrat finance spokesman Jamie Greene stated: “The picture this paints of the state of the Scottish public finances is not a pretty one.

“Scots have paid more tax but only a fraction of that is available to spend on public services.

“The welfare bill is rising fast, and of course we need a compassionate system but more needs to be done to create good jobs and get those who are economically inactive back to work through skills, training and fast access to proper NHS care.”

Finance Secretary Shona Robison said the report “recognises the challenging financial environment that Scotland continues to face as a result of global uncertainty and higher inflation”.

Finance Secretary Shona Robison | Robert Perry/PA Wire

She added that the Scottish Government’s position was made worse by the “failure” of UK ministers to fully fund the increase in employers’ national insurance contributions in the public sector, as well as by the welfare reforms being pursued by Labour at Westminster.

Ms Robison demanded the UK Government “must change course on these welfare cuts, as well as removing the two-child limit and reinstating the winter fuel payment”.

Speaking for the Scottish Government, she added: “By contrast, our social security policies are 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.”

The Finance Secretary added: “Our investment in this area over and above the money we get from the UK Government is projected to be less than 3.5% of the total Scottish Government Resource Budget by 2029-30.”

Swinney calls for immigration powers

First Minister John Swinney said the UK government’s stance on immigration stance poses a “critical economic threat” to Scotland.

The Prime Minister released a new White Paper on immigration earlier this month, laying out plans to extend the time people will have to stay in the UK before applying for settled status, along with the end of visas for overseas care workers and reducing the time graduates are allowed to stay after leaving university.

Speaking at a conference on Thursday, the First Minister again voiced his opposition to the plans, warning of the impact on Scotland’s ageing population of a reduction in immigration.

“I am profoundly concerned by the direction of travel that is being taken on migration,” he said.

“I made this point to the Prime Minister when I met him on Friday – that the changing dynamics of our labour market and the need for us to encourage migration to support our working age population has to be recognised in the approach that is taken to migration in the United Kingdom.”