Why £3.4 billion boost from Labour is not enough to preserve Scotland’s universal benefits

Cuts such as the removal of free bus travel for people seeking asylum and the rise in ScotRail peak fares were deemed necessary to help fund pay rises for council workers, doctors, train drivers, nurses, and teachers amid ongoing trade union disputes.

Despite this, ministers have expressed concern that tough decisions will be necessary in the Scottish Budget for next year, due to be announced on Wednesday. At face value, the additional £3.4 billion in Treasury funding that Scotland will receive in the next financial year, following UK Government’s Budget, should provide some relief.

More tax rises?

However, a significant share of these funds is likely to be absorbed by rising costs in Scotland's large public sector, which requires additional resources to cover increased National Insurance contributions. And what is left may well be absorbed by further pay settlements in the future.

While tax increases are an available option, this would not be received well amid cost-of-living pressures and slow economic growth, sitting at 0.1 per cent last quarter.

So what needs to budge? It’s clear that funding allocated to support policies regarded by the SNP as forming a key part of Scotland’s ‘social contract’ – universal benefits like free tuition fees, free prescriptions and the baby box – hasn’t been reconsidered, even though this is putting the country’s public finances on an unsustainable footing. First Minister John Swinney has ruled out substantial changes.

Scotland’s progressive tax system, in which higher earners pay more, generating £1.5bn in extra revenue for public services, does help fund this social contract spending.

However, at a time when the pressures on the Scottish Budget are growing, not easing, the question has to be asked: is it now time for universal programmes to be means-tested in an effort to free up funds for other priority areas that desperately require support across the housing, health and education sectors?

Baby box blues

For instance, the baby box – designed to ensure that every family with a new-born has access to £420-worth of items needed in the first six months of a child’s life – may be an initiative better targeted at single parents or families experiencing financial hardship, rather than given to everyone.

In 2023 alone, it is estimated that baby boxes dented Scotland’s Budget by £19.3 million. These are funds that could have been used to minimise the impact of the SNP’s spending cuts on other public benefits.

No one is arguing that the solution to the Scottish Government’s Budget crisis is the elimination of all the universal provisions in Scotland’s social contract. However, in challenging economic times characterised by crumbling public services, high inflation, and slow economic growth, means-testing elements of the state safety net will ensure that vulnerable Scots get the assistance that they need.

Scotland’s growing financial squeeze is set to continue, driven by rising labour costs and a sluggish economy. As the SNP faces tough choices, it needs to take the right ones.

Alexandra Colalillo is an economist