Government Budget Swings Into Motion Once More
The Scottish Government's financial outlook for the coming years has taken a turn following the Spending Review 2025, with a more constrained medium-term outlook for both resource and capital budgets than previously expected.
According to the latest figures, the Scottish Government will receive an average of £2.4 billion per year in resource funding (day-to-day spending) between 2026-27 and 2028-29. This represents a 0.8% real-terms annual growth, which is lower than the average for UK government departments. Finance Secretary Shona Robison noted that this growth is lower than anticipated, effectively meaning Scotland has been short-changed by about £1.1 billion over three years compared to if resource funding had grown in line with overall UK Government spending.
In terms of capital spending, the Scottish Government will see an average of £510 million per year between 2026-27 and 2029-30. This supports investment projects such as the Inverness Freeport development, naval base redevelopment, and supercomputer initiatives at Edinburgh University. However, it is less generous than the Scottish Fiscal Commission had predicted, and non-defence capital spending is set to fall by -0.9% a year in real terms going forward, meaning it's nearly 4% lower by 2029-30 than this year.
The capital allocation for the Scottish Government is less generous than the Scottish Fiscal Commission had predicted, although there is an increase in the financial transactions allocation. The capital allocation increases by £0.6 billion (7.7% in real terms) next year, but then falls back to below 2025-26 levels by the end of the decade. This could potentially lead to cost increases in major projects due to the bringing forward of capital spending.
The block grant for the Scottish Government increases by £0.6 billion (7.7% in real terms) next year, but then falls back to below 2025-26 levels by the end of the decade. This means that funding for the Scottish Government will be £0.7 billion lower than the Scottish Fiscal Commission's central estimate published on 29 May by 2028-29.
The Scottish Government's Medium-Term Financial Strategy and the new Fiscal Sustainability Delivery Plan will be published in two weeks' time. The allocation for day-to-day spending is slightly below the average for overall resource spending, growing at an average of 0.8% a year after accounting for inflation. The UK Government will argue that its efficiency drive will make it possible to do this while not cutting services.
Rachel Reeves has delivered the Spending Review for both resource and capital budgets across departments and devolved administrations. The Spending Review includes additional announcements that will affect Scotland, such as investments in defence manufacturing, science in Edinburgh, carbon capture and storage in Aberdeenshire, an additional growth deal for Falkirk and Grangemouth, and GB Energy funding. The exact nature of the GB Energy funding is still to be confirmed.
In essence, although there is some short-term improvement in funding relative to forecasts, the medium-term outlook for the Scottish Government's resource and capital budgets under the Spending Review 2025 is more constrained than earlier expected. This places pressure on the Scottish Government's ability to meet service and investment priorities in the coming years. The Scottish Government now has a baseline to work from, but the track record of spending reviews constraining public spending is much less clear.
The Spending Review 2025 has led to a more constrained medium-term outlook for both the Scottish Government's resource and capital budgets than previously expected, according to the Medium-Term Financial Strategy and the new Fiscal Sustainability Delivery Plan. This could potentially affect business, finance, politics, and general-news, as the Scottish Government may face challenges in meeting service and investment priorities in the coming years, especially with a lower-than-anticipated growth rate for resource funding and a decreasing non-defence capital spending.
