Warning SNP's flagship tuition, prescriptions and benefits policies at risk without further tax hikes
The Scottish government’s flagship policies are poised to be put at risk due to a funding erosion for Holyrood
The next Scottish government may be forced to cut free university tuition and more generous benefits without more tax hikes as the country loses its funding advantage relative to England, a think tank has warned.
Under the SNP, free tuition fees, prescriptions and more generous social security offers are in place north of the Border - but a lack of funding could force the party that forms the government after May’s Holyrood election to rethink those pledges.
The Institute for Fiscal Studies (IFS) has warned the Scottish government will struggle to pay for its flagship policies amid an increasingly strained budget unless it finds ways to collect more tax.
The economists said that in the 2024-25 financial year, the Scottish government received 26 per cent more per resident for devolved public services than compatible services in England.
The IFS said this was the main factor that allowed Scotland to have more generous public services, including smaller class sizes and free personal care.
However, analysis shows the funding has already decreased from 32 per cent in 2019-20 and by 2028-29, it will drop to 23 per cent.
The think tank said the fall was a result of the normal operation of the Barnett formula – the devolved funding mechanism that allocates funding to Holyrood – and not active policy decisions.
The Barnett formula sets out how much money Scotland gets when English spending – in areas devolved to Scotland – goes up or down.
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The IFS said the “Barnett squeeze” came as funding for Holyrood has been rising by about 2 per cent a year in real terms since 2019-20 – something it said was “not inconsiderable” but a slower amount than south of the Border.
Looking ahead, economists said the squeeze will be accompanied by a “sharp slowdown” in funding growth and that on current plans, funding for Scottish public services may be no higher in real terms in 2028–29 than it is now.
The report said the challenging state of the country’s finances means the Scottish Government would find it hard to continue to fund its more generous social policies including free university tuition.
It warned these will increasingly need a combination of a bigger devolved tax intake – whether through higher economic growth or higher taxes – and more efficient public services.
Without this, the IFS warned, cuts to public services or benefits will likely be necessary to balance the books, as is required every year of the Scottish government.
The think tank said the Scottish government’s budget was currently 14.3 per cent higher in real terms compared to 2019.
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The think tank pointed to tax rises for higher-income Scots as the biggest factor to the growing contribution of devolved funding, but cautioned that slower wage growth since tax devolution and behavioural changes in response to the rises are estimated to have cut this number by half.
Capital funding – used for long-term infrastructure projects including hospitals and roads – increased by 17 per cent in real terms since 2019, the research found.
Day-to-day spending is expected to slow down to 1 per cent a year in the three years to 2028-29, with that decreasing further to 0.3 per cent once welfare is removed.
The IFS said the Scottish government will face tough trade-offs as funding slows. Scottish Labour leader Anas Sarwar has pledged to keep free tuition fees and free prescriptions if he becomes first minister, but has called for the benefits bill to be looked at.
David Phillips, head of devolved and local government finance at the IFS and co-author of the report, said: “After falling during the 2010s, the last six years have seen real-terms increases in Scottish government funding, mostly as a result of increases in UK Government funding. Yet UK government decisions now mean that growth in funding is set to slow over the next few years.
“Indeed, without top-ups to UK government spending plans, the outlook for Scottish government funding will likely be even more challenging than official forecasts suggest – given these forecasts implicitly assume earnings and hence income tax revenues in Scotland will outpace those in the rest of the UK.
“If wages and hence tax revenues in Scotland instead grow in line with the rest of the UK, funding for day-to-day spending on public services may even be no higher in real terms in three years’ time than now.’”
Martin Brogaard, research economist at IFS and co-author of the report, said: “Scotland currently enjoys more generous public services than England, in large part because the Scottish government receives around 26 per cent more funding per person than is spent on comparable services in England.
“But after growing during the 2010s, this funding advantage is now shrinking as the so-called ‘Barnett squeeze’ bites.
“Without substantial increases in devolved revenues, improvements in public sector efficiency or cuts to other spending, it will be increasingly difficult for future Scottish governments to continue to provide a wider range of free services – such as university tuition and personal care – than their counterparts elsewhere in the UK.”
IFS director Helen Miller said: “The tricky funding outlook facing the next Scottish government has important implications for assessing the proposals the different Scottish parties will make in the upcoming election campaign.
“Cuts to some taxes or increases in spending on priority items are feasible but will require tough choices elsewhere in a Scottish budget which will already be under some strain.”
Scottish Labour finance spokesperson Michael Marra said frontline public services were being “put at risk by the SNP’s financial illiteracy”.
He said: “Scots should not be punished for the SNP’s failure to make its sums add up.”
Scottish Conservative finance spokesperson, Craig Hoy, said: “This is a grim warning about what lies ahead for Scottish taxpayers thanks to the SNP’s dire financial mismanagement.
“They are already forced to pay the highest taxes in the UK to fund the SNP’s ballooning and unsustainable benefits bill and now more tax rises and cuts look set to be on their way.”
He added: “John Swinney’s SNP government has been spending like a drunken sailor and clobbering hard-working Scots with the bill, but they have finally run out of road.
“They’ve abjectly failed to rein in reckless public spending and failed to grow Scotland’s economy with their anti-business policies.”
A Scottish Government spokesperson said: “The Scottish Government has delivered a balanced budget every year despite the challenging financial environment we have faced.
“The decisions we have taken to ask higher earners to pay a little bit more – while ensuring most income tax payers pay less than in the rest of the UK – mean that we can support vital public services and provide free tuition, prescriptions and the Scottish Child Payment to help tackle child poverty.
“We will continue to focus resources to support our strategic priorities whilst maximising opportunities for economic growth, embedding a strategic approach to tax and reforming our public services.”
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