Next Scottish government faces ‘really difficult’ spending choices, economists say

The next Scottish government will need to make “really difficult” spending decisions soon after taking power, including tackling its large public sector pay bill, senior economists have said.

Economists with the Fraser of Allander Institute, at the University of Strathclyde, believe the manifestos published by Scotland’s political parties during the campaign failed to tell voters about the true scale of the challenge.

Prof Mairi Spowage, the institute’s director, said the next government would need to have a “reckoning” after the 7 May election because the last Scottish National party administration consistently spent more money than it received from its core sources of funding.

She said it had been heavily reliant on non-recurring windfalls, such as fees from the ScotWind offshore wind licensing round or one-off payments from the Treasury, to fund its higher spending.

The next government would therefore face the most challenging budget since the Scottish parliament was founded in 1999, she said, and may need to cut this year’s spending to cope with the shortfall.

“The parties have engaged in a collective bout of fiscal denial with manifestos which have lots of commitments, yes, some ways to save money, but any money that is saved is then spent immediately,” she said at a recent briefing for economists.

“We can’t go on as we are, never mind spend more money.”

The FAI’s analysis shows that, on average, Scottish public spending has grown in real terms by 3.9% a year since 2019. Yet its income from taxes, the UK government’s annual grant and one-off sums from energy levies and so on grew by only 3.6% a year.

Scottish spending has also grown “significantly” faster than the UK’s, which has been limited to 3% a year on average over the same period, partly because the SNP government breached its policies on public sector pay, the FAI said.

Last year, the Scottish government estimated it faced a £5bn gulf between its spending commitments and income by the end of this decade. SNP ministers published a revised spending strategy in January, which they said would cope with much of that overspend.

The Scottish Fiscal Commission, the official watchdog, forecasts spending for day to day Scottish services will rise by only 1% a year over the next five years.

The FAI’s analysis echoes the view of the Institute for Fiscal Studies, which said on Monday none of the parties’ plans were “fiscally credible”.

David Phillips, the IFS’s lead on devolved government finances, said every party displayed a “lack of realism regarding just how tough the fiscal challenges facing the next Scottish government are”.

João Sousa, the FAI’s deputy director, said the last Scottish government had trimmed its spending plans in January to partly address the funding gaps but there were still a number of “unexploded traps” laying in wait for the next administration.

Those include meeting the costs of public sector pay growth, future health and social care cost increases and funding Scotland’s rising social security bill, which is forecast to be £1.2bn higher than its share of UK welfare spending by 2031.

The Scottish government spends nearly half its £59bn annual budget on pay, such as council refuse workers, doctors, nurses and teachers.

Two years ago, it set a public sector pay policy to cap pay rises at 9% over the next three years, with no year exceeding 3%. But its actual pay deals, using collective bargaining with public sector unions, took up 8% of that within two years.

Sousa said that 9% cap would have to be breached next year if public sector pay were to keep pace with inflation. And as these wage increases were recurring costs, every future government would have to keep funding them unless there were cuts in public sector employment.

Scottish ministers say they can save £1.5bn through efficiency savings and cutting the public sector workforce, chiefly by natural wastage. Sousa said that approach lacked credibility and ministers could “only paper over things for so long.”

All the major parties in this election – the SNP, Labour and the Conservatives – have promised voters they will not raise income tax, and said they aspired to cut income tax or to simplify the system once government finances allowed.

Prof Graeme Roy and Prof Anton Muscatelli, of Glasgow University, and Prof Stuart McIntyre, of Strathclyde university, three of Scotland’s leading economists said the next government’s “overarching challenge will be economic and fiscal”.

Writing in the Economics Observatory journal, they said: “Slow growth in living standards, an ageing population and rising spending pressures mean that the next parliament will face difficult budgetary choices. A prolonged conflict in the Middle East may make that position even more challenging, particularly if the UK overall becomes even more constrained fiscally.”