How the UK spending reviews will shape Scotland's finances

The Herald Scotland

3 days ago

The UK Government has already trailed plans to increase defence spending, boost spending in the NHS, and reform social security. But it has said much less, so far, about day-to-day spending on public services. With limited headroom for new funding, any shift in priorities is likely to mean savings elsewhere.
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Spending decisions on reserved areas such as the industrial strategy, research and development, and defence procurement will all have an impact here in Scotland.
But the Scottish Government's budget will also be impacted too. Even with recent tax devolution, the Barnett Formula remains the most significant contributor to the Scottish Government's budget. The formula ensures that any increase or decrease in Whitehall spending in devolved areas – for example, health or education – triggers a population-based adjustment to Scotland's budget.
That means that what is announced in the spending review will not just matter for Whitehall departments, it will directly shape the financial envelope available to Holyrood. The onus then falls on the Scottish Government to set out its own spending priorities.
June's medium-term financial strategy will likely give a high-level overview, but for greater detail we will need to wait for our the spending review in Scotland. The Cabinet Secretary for Finance has indicated that a timeline for that review will be published in June.
The interaction between UK and Scottish Government fiscal policies does not stop with the Barnett Formula. Just last month, we were reminded of further – often subtle – interactions between developments in the UK and the Scottish budget.
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In publishing our updated five-year outlook at the Scottish Fiscal Commission, we highlighted how further fiscal pressures had emerged since the turn of the year. One such factor was the latest information on the Scottish Government's devolved tax and social security data, relative to the rest of the UK.
Under Scotland's fiscal framework, the Scottish budget does not always benefit when its tax revenues rise. What matters is whether those revenues are growing faster than their counterparts in the rest of the UK.
This is due to a core principle in the fiscal framework that seeks to protect the Scottish budget from shared UK-wide economic risks. But, on the other hand, this means that any divergence in performance between Scotland and the rest of the UK – the so-called net tax position – has a direct consequence on the level of funding available.
In recent times, we have seen an improving performance – and outlook – for revenues in the rest of the UK that is not being fully matched in the data for Scotland, leading to knock-on implications for Scotland's budget. This is one of the lesser-known intricacies of our devolved fiscal setup: stronger tax growth in England can mean less money for Holyrood than planned, even if Scotland's own outlook is unchanged.
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A similar issue arises in social security. As more benefits are devolved – including disability and carer payments – what matters is not just how much is spent, but how that compares to the funding received.
Scottish Ministers have made deliberate policy choices to expand eligibility and increase support, particularly in areas linked to child poverty and disability. Those choices have widened the gap between spending and funding.
But the latest forecasts show that planned UK Government reforms to reduce spending in England and Wales – especially through tighter eligibility for benefits related to disability and ill-health – might make that gap larger by lowering the equivalent funding to Scotland. By 2029–30, we project that annual spending on devolved social security will exceed funding by £2 billion.
Holyrood may have greater control over tax and spend decisions than in the past, but the budget remains integrated with decisions made in Westminster. Any meaningful strategy for Scotland's public finances – including in future spending reviews – must start with a clear understanding of that interdependence.
Graeme Roy is professor of economics at the University of Glasgow's Adam Smith Business School.