Elderly to squeeze Scotland's 'unsustainable' finances, with risk of £16bn budget gap

The Scottish Fiscal Commission (SFC) said the pressures would be “really quite acute” as the share of elderly people north of the Border peaks in the next 25 years, earlier than in England.

The organisation warned the budget gap could spiral to an average of £16 billion per year - which would require huge spending cuts or tax rises - if the nation’s health worsens and the UK government acts to address its own debt levels through fiscal tightening.

The Institute for Fiscal Studies (IFS) said the analysis “makes clear that households either side of the Scottish border will likely face substantially higher taxes or a state that does relatively less in the decades ahead”.

Professor Graeme Roy, chair of the SFC, said: “Our assessment suggests that future Scottish Governments will face significant challenges funding devolved public services as a result of an ageing population and rising health pressures.

“The Scottish population ageing earlier than the rest of the UK will result in health spending over the next 25 years growing faster than the funding provided through the Barnett formula.”

In a new report taking a long-term look at the nation’s finances, the SFC said health and social care spending was projected to rise from around 40 per cent of Scottish devolved public spending in 2029/30 to almost 55 per cent in 2074/75.

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This is largely because of Scotland’s ageing population, with the number of people aged 85 and over projected to almost double over the next 25 years. The Scottish share of the UK population aged 75 and over is expected to peak over that time period, before the rest of the UK then catches up.

Prof Roy said: “There’s a particular bump coming over the next 25 years or so in Scotland’s economy, where you have got a large number of elderly people, people who become relatively elderly, over the next few years, and that’s going to put a particular squeeze on the Scottish budget relative to the rest of the UK, which doesn’t have that same challenge over the next few years.”

He said the average healthcare spend for someone aged between 16 and 60 is between £2,000 and £4,000 per year. For those above 70, this increases to about £6,000, and for those aged 80 it is about £8,000. For someone in their late 80s, it rises to £14,000.

In its baseline scenario, the SFC projects Scottish devolved public spending will have to be reduced by an average of 1.2 per cent each year between 2030 and 2075 to balance the budget, which is the equivalent of £1bn.

The pressure is greater in the first decades “because demographic pressures in Scotland are greater than in the rest of the UK over the next 25 years”, it said.

However, the SFC also modelled better and worse health scenarios. Under the former, which would see greater improvements in life expectancy among other factors, the budget would see a boost of 6.2 per cent, or £9.6bn by 2074/75.

But under the latter, which better reflects more recent trends and assumes the gap between Scottish and overall UK life expectancy increases, the budget gap would reach 4 per cent by 2075, equivalent to £6.6bn.

The SFC said rising health costs and an ageing population are not unique to Scotland, and also affect the wider UK. The Office for Budget Responsibility previously said the long‑term path for the UK public finances was not sustainable.

If the UK government takes action to reduce its debt to pre-pandemic levels through fiscal tightening, the projected budget gap in Scotland between 2030/31 and 2074/75 could increase to an annual average of -11.1 per cent, equivalent to £14bn worth of spending. Combined with the worse health scenario, this would mean an average annual budget gap of £16bn.

“The annual budget gap resulting from a UK fiscal consolidation is much larger than the changes in the annual budget gap in the better and worse health scenarios,” the SFC said.

“Although better population health would improve the fiscal position, the scale of the UK fiscal challenges mean improvements in the populations’ health would not be enough by themselves to solve the fiscal sustainability challenges.”

David Phillips, head of devolved and local government finance at the IFS, said the report “highlights the fiscal challenges facing the Scottish and UK governments over coming decades as populations age and public service costs rise”.

He said: “Under current constitutional arrangements, Westminster’s tax and spending choices will remain a key driver of the Scottish Government’s budget.

“If the UK government only meets half the projected spending increase through tax rises, the SFC projects an annual ‘funding gap’ for the Scottish Government equivalent to almost 10 per cent of its budget by 2050 – over £5bn in today’s terms. Larger tax increases would reduce this gap, but mean higher bills for households and businesses.”

Mr Phillips said growing international tensions on trade and defence “will only add to the fiscal pressures facing Scotland, the UK and countries across the world”.

He said: “Today’s report makes clear that improving health and the performance of the healthcare system is vital to Scotland’s finances. However, unfortunately, even substantial improvements in health won’t be enough to avoid difficult decisions on tax and spending.”

Health Secretary Neil Gray said: “We note the SFC’s analysis and outline projections for the coming 25 years. While there are obvious limits to long-term projections of this nature due to our rapidly changing world, we are cognisant of the anticipated change in Scotland’s demographics.”

Mr Gray said the Government planned to “strengthen Scotland’s NHS, including measures to make it easier for people to see a doctor, alongside increased investment to improve access to treatment and to work pro-actively with people to prevent illness”.

He also said ministers were working with leaders at local government body Cosla to “prioritise prevention”, adding the Government’s medium-term approach to health and social care reform would be published by the summer.

The Health Secretary added: “This Government has delivered a balanced budget every year while taking forward action to improve the overall sustainability of the public finances for the future.”

However, Conservative public finance spokesman Alexander Stewart described the report as “another damning verdict on the SNP Government’s inability to live within its means”.

The Tory MSP said: “The nationalists’ failure to get a grip on public spending threatens Scotland’s future financial sustainability and with it the funding of our public services.”