IFS: After a bumper top-up this year, current plans imply a real-terms freeze in day-to-day Scottish health and social care spending in 2025–26

After £1.5 billion of in-year top-ups in the current financial year, 2024–25, the plans set out for day-to-day health and social care spending in the Scottish Budget for the coming year, 2025–26, now represent a real-terms freeze (i.e. after accounting for inflation).  

The big real-terms boost to spending this year – now equivalent to 5.3% in total, or 4.1% after stripping out funding now being transferred to councils' core funding – if spent well should help to improve performance in the coming year too. However, it seems likely that next year's spending plans will eventually be topped up too, given the rising demands for, and costs of, health and social care services. 

The big in-year top-ups to health and social care spending this year have been funded largely from increased funding from the UK government, notably in Chancellor Rachel Reeves's first UK Budget. With a difficult fiscal situation it is unlikely further large increases in UK government funding will be forthcoming over the next 12 months. 

This means the Scottish Government will likely have to rely on other sources of funds instead. This could include some combination of: carrying forward underspends from this year into next via the Scotland Reserve; utilising Scotwind income from offshore windfarm licences that it currently plans to use in later years; or making in-year cuts to other areas of spending to free up more for health and social care.  

These are among the findings of the fifth and final chapter of the Institute for Fiscal Studies (IFS) third annual Scottish Budget report. Other findings include: 

• The latest plans imply that overall day-to-day spending on public services will increase by 1.2% in real terms between this year and next. 

• A range of smaller departments are set to see much bigger increases in day-to-day spending than that – in part because their budgets were cut in-year this year, and so next year's budgets look bigger in comparison. This includes the Scottish Government's ‘constitution, external affairs and culture' portfolio (10% real-terms increase), its ‘net zero and energy' portfolio (21%) and its ‘Deputy First Minister, economy and Gaelic' portfolio (24%). In contrast, the ‘rural affairs, land reform and islands' portfolio's day-to-day budget is set to fall (−3%). 

• Councils are set to fare a little better than average, with the Scottish Government's ‘finance and local government' portfolio set to see a 1.8% real-terms increase from this year to next. Councils will also see an increase in funding being transferred from other portfolios, and new income from a levy on the producers of packaging used for household products. However, an increase in council tax of nearly 20% in April would be needed to match the rate of increase in funding English councils can expect to have receive between 2023–24 and 2025–26.    

As in the current year, the initial plans for 2025–26 will be subject to revision during the course of the year – perhaps significantly so.  

The Scottish Government is holding £350 million of funding for this year in a ‘contingency' reserve in case of overspends of service-specific budgets, or shortfalls in tax revenues, in the last few weeks of the year. Recent years suggest, if anything, underspends rather than overspends of final budgets are more likely. This must surely be the hope, allowing the Scottish Government to carry forward this money for use in future instead.  

If £350 million was carried forward and used to boost day-to-day health and social care spending in 2025–26, that would allow for a 1.9% real-terms increase on top of the amount now budgeted to be spent this year (rather than a real-terms freeze).  

The chapter also considers the outlook for Scottish Government funding for the period between 2026–27 and 2028–29 – that is, the period expected to be covered by the UK Spending Review planned for June. It finds that increases in funding are set to slow substantially compared with recent years. This means meeting the rising costs of health and social care would likely necessitate cuts to many other ‘unprotected services'.  

This is also set to be true of the rest of the UK, but forecast increases in spending on devolved social security benefits (including to mitigate the two-child limit in universal credit) will mean tougher trade-offs in Scotland. 

Bee Boileau, a Research Economist at the IFS and an author of the chapter said: 

‘The Scottish Government has made big top-ups to health spending plans this year which, if spent well, should improve the performance of the health service in the coming year too. But with essentially no further increase in day-to-day health spending currently planned for 2025–26, it is likely additional funds will need to be found for top-ups to the health budget over the next 12 months too. 

The fiscal situation means it is unlikely that much if any extra funding will be forthcoming from the UK government. Instead, the Scottish Government will have to rely on carrying forward funding from this year into next, and on cutting back budgets for other service areas – most of which are currently set to see much bigger year-on-year increases in spending than the Scottish health service.' 

David Phillips, an Associate Director at the IFS and another author of the chapter said: 

‘The Scottish Government has repeatedly highlighted a ‘£2 billion increase' for the Scottish health service in 2025–26. But that is based on comparing plans for next year with the original budget for this year, and therefore is not an accurate reflection of how spending really is changing. Even by the time the Scottish Budget for 2025–26 was first published in December, in-year top-ups this year meant the increase next year was more like £1.3 billion. And the latest in-year top-ups confirmed in January mean this has now fallen to £0.6 billion.  

Comparing plans for the coming year to the latest plans for the current year is most meaningful. Scottish Ministers have been asked to adopt this approach by various stakeholders, including Scottish MSPs. We repeat that call again.'