It was Labour who created Scotland’s budget crisis

Chancellor Rachel Reeves – on one of those flying colonial visits to Scotland that London politicians like to make – accused the SNP Government of “making decisions that were not sustainable”.

So, is there a black hole in Scotland’s public finances? And if so, whose fault is it and how can it be plugged?

Unlike Westminster, Holyrood has the advice of an independent body that keeps tabs on public spending – the Scottish Fiscal Commission (SFC). Set up in 2017, it produces two statutory reports each year. These forecast the size of the economy, likely tax income and unavoidable expenditures on social security and pensions. This provides an independent basis for Scottish Government borrowing and spending decisions.

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In addition, the SFC comments on the reasonableness of the Scottish Government’s budget decisions and the long-term sustainability of public finances. It’s worth rehearsing all this because Westminster has no such independent fiscal watchdog. There is the Institute of Fiscal Studies, but that is a private, non-statutory body whose (often correct) advice is routinely ignored by London governments.

And there is the official National Audit Office, but that only looks at value-for-money decisions after the fact, rather than overall budgeting plans – and there’s a Scottish equivalent. Conclusion: it is actually pretty difficult for any Scottish administration to be profligate with the national purse. Unlike our friends in the south.

The current SFC commissioners are professors Graeme Roy (Glasgow University), Domenico Lombardi (Rome and World Bank), Francis Breedon (Queen Mary University of London) and David Ulph (St Andrews). Ulph is also a former chief economist at HM Revenue and Customs, where he was responsible for forecasting the Treasury’s own tax income. So – a pretty high-powered team. What does it say?

The update of its annual report the SFC published last week makes for hard reading: “Since our December 2023 publication the pressure on the Scottish Government’s finances has increased. The Scottish Government is now facing a challenge in balancing its budget.”

Now of course, by law, all Scottish governments have to balance their budgets – unlike Westminster. If there were a Labour administration at Holyrood tomorrow morning, it would still have to balance the books. This is a technical detail Reeves seems unaware of.

However, the budgetary challenge is real. How did we get here? Again, the SFC has the answer: “The 2024-25 position was tight when the budget was set in December 2023, since then the pressure over public sector pay has grown.”

In other words, we have a problem with pay settlements north and south of the Border, arising from runaway inflation with a global origin. It is unlikely this could have been avoided by any administration. Public sector pay in Scotland runs to a total of £25 billion and rising – more than half the entire revenue budget.

But here’s a thing. One of the first decisions of the new Starmer Government was to offer bigger pay settlements to the unions than the Tories were proposing. The outgoing Conservatives had pencilled in a 2% public sector pay settlement, but Labour has agreed a 5%-6% hike.

That is where some of Rachel Reeves’ notorious budget “black hole” has come from. And while the SNP Government had previously agreed public sector pay deals that were higher than in the rest of the UK, Starmer & Co have now caught up – and then some.

So even if the SNP had kept to the Tory limits, those blue lines would now have been breached thanks to Reeves. Conclusion: the Holyrood budget problem was made in Westminster.

As I write, there has been no announcement about any fresh Barnett consequentials coming to Holyrood arising from Labour’s pay increases. Reeves’s emergency Treasury spending audit at the end of July did hint that English government departments would get extra cash to pay for some – but not all – of the proffered wage rises.

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That would normally imply a Barnett consequential for the devolved administrations. However, Reeves was also pretty clear that most of the higher wage bill would come from “savings”. In which case, Holyrood will have to find those, too. Again, this is a budget crisis imposed by Westminster. (For the record, the application of VAT to private school fees won’t have a Barnett consequential, as VAT is a reserved matter.)

Should public sector wages have been increased? The answer is yes, on equity grounds and for economic reasons. If they had been squeezed while prices rose, consumption in the economy would have faltered and the likelihood of slower growth (and even recession) would have increased. Reeves should pay up and not try to pass the buck to Holyrood.

The SFC does chide Holyrood a bit: “Decisions by the Scottish Government have played a role in these budget pressures. As well as previous public sector pay deals being higher than in the rest of the UK, other policy commitments, such as the Council Tax freeze in 2024-25 and the ongoing effects of its social security reforms, have contributed to the pressure on the Scottish budget.”

I am with the commission on criticising the decision to freeze Council Tax. Yes, it was one of the few ways the SNP Government could mitigate rises in the cost of living. But if freezing Council Tax was meant as an electoral bribe, it failed spectacularly. Instead, it has let Labour councils off the hook.

Without a freeze, which is funded by Holyrood, Shona Robison could have kept universal winter fuel payments. Besides, it is more democratic to shift the burden of taxation to councils, so they can fund their own decisions.

Where Holyrood does have a potential and serious funding issue is in social welfare support. According to SFC calculations, spending on devolved social security provision (Child Payment, disability allowances etc) will be about £1.1 billion more than is covered by Treasury block grant adjustments. The SFC reckons that gap could grow to £1.5bn by 2028-29.

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But all is not doom and gloom. The Scottish Government has some financial reserves, though it is likely to draw on most of these to get through the rest of this fiscal year.

It also has about half-a-billion pounds in unused funds from offshore wind licence auctions. At the time, lots of folk criticised Holyrood for not getting enough dosh for those licences. Now those chickens are coming home to roost.

Prognosis: ScotGov will limp through this fiscal year and probably next. I suspect Shona Robison is doing a Rachel Reeves and talking tough so she has a bit of cash left to spend just before the 2026 election. But things are going to be very tight. Which raises a thought: why not outflank Labour and introduce a land valuation tax – the best form of wealth tax. Time to change the rules of the game, Shona.