Unabated Spending Resurgence Makes a Return
The recently announced UK Spending Review 2025 has significant implications for the financial landscape of the Scottish Government, affecting both resource and capital budgets.
### Resource Budgets
The Scottish Government's resource budget is set to grow at an average annual rate of 0.8% in real terms, which is below the average growth rate for UK Government departments. This growth would have resulted in an additional £1.1 billion over three years for Scotland, as per the comparison with UK Government departments' growth rates.
Total resource funding is expected to increase by £1.7 billion in 2026-27, £1 billion in 2027-28, and £1.3 billion in 2028-29, equating to a 3.4%, 2.0%, and 2.4% increase, respectively, in cash terms.
### Capital Budgets
The capital block grant for Scotland is projected to increase by £0.6 billion in real terms next year, representing a 7.7% increase. However, the capital block grant is expected to fall below 2025-26 levels by the end of the decade.
### Comparison with Scottish Fiscal Commission's Forecast
The Scottish Fiscal Commission (SFC) has considered the impact of the Spending Review on Scotland's funding outlook. While the overall spending envelope is clearer, the allocation between reserved and devolved areas could affect Scottish Government funding. The SFC's forecasts combine economic projections and policy assumptions, shaping the Scottish Government's medium-term financial strategy.
Despite increased certainty from the Spending Review, other economic factors and policy decisions remain drivers of uncertainty for Scotland's fiscal outlook.
### Conclusion
The Spending Review 2025 presents a mixed picture for Scotland, with modest resource budget growth and a temporary boost in capital funding. The Scottish Government remains concerned about the overall funding levels relative to UK departments and the potential economic challenges ahead.
In the coming weeks, the Scottish Government is expected to release its Medium-Term Financial Strategy and the new Fiscal Sustainability Delivery Plan. The Fraser of Allander Institute has been the first to publish this analysis.
It is important to note that the capital allocation is less generous than the Scottish Fiscal Commission had predicted, although there is an increase in the financial transactions allocation. The totals and allocations laid out in the SR may bear less resemblance to what will happen in the future.
The UK Government's argument is that its efficiency drive will make it possible to maintain services while increasing investment, but concerns about potential cost increases due to bringing so much capital spending forward and the impact on input and labour prices remain.
The Spending Review also includes funding for GB Energy, much of which will be in the form of financial transactions. Schools in England have done less well than expected, contributing to a slightly lower resource spending allocation in Scotland.
Beyond the funding of the Scottish Government, announcements regarding defence manufacturing, investments in science in Edinburgh, carbon capture and storage in Aberdeenshire, and an additional growth deal for Falkirk and Grangemouth will also benefit Scotland.
The track record of spending reviews constraining public spending is much less clear. Major projects have a habit of seeing larger cost increases than foreseen, and bringing so much capital spending forward could cause prices of inputs and labor to increase.
- The Spending Review 2025 in the UK has significant implications for the financial aspect of the Scottish Government, particularly in business matters, as it affects both resource and capital budgets.
- The Scottish Government's concern about the overall funding levels relative to UK departments is not only a financial issue but also has political and general-news implications, as it may affect the nation's economic stability and future development.
