Scotland’s 2026 election: the fiscal choices facing the next parliament
Next month, Scotland goes to the polls to elect a new administration.
With the further transfer of fiscal powers under the Scotland Act 2016 nearing completion, the next Scottish Parliament will have significant scope to shape economic and social outcomes.
But it will do so in a much more constrained fiscal environment. The outlook for the public finances across the UK is challenging, while structural pressures – from an ageing population to weak economic growth – are intensifying the strain on public services.
Scotland’s fiscal powers
Over the past decade, Scotland has accumulated substantially greater fiscal responsibility. The Scottish Parliament now sets income tax rates and bands, administers a range of devolved taxes, and oversees a growing share of social security spending. As a result, economic performance and fiscal sustainability are no longer background conditions, but central to policymaking.
This reflects the logic of “risk and reward” fiscal devolution: greater autonomy, but also greater exposure to the effects of economic outcomes (good or bad).
The current Scottish Government has used its new powers to pursue a distinct tax strategy. The top rate of income tax is now 48 per cent, compared with 45 per cent elsewhere in the UK. Most significantly, the higher-rate threshold begins at just over £43,500 in Scotland, compared with around £50,000 in England. Over time, this divergence – combined with fiscal drag – is bringing more taxpayers into higher bands. In 2016–17, around 300,000 Scottish taxpayers paid the higher rate; that number could approach 1 million by the end of the decade.
Much of the additional revenue has funded expanded social security commitments – equivalent to around £1 billion more than the funding provided by the UK Government to the Scottish Government to deliver comparable levels of payments as in England and Wales. In Scotland, we now have new payments such as the Scottish Child Payment, but also higher spending from policies designed to encourage take-up of key disability benefits.
Economic backdrop
The economic context facing voters remains subdued.
Even before the recent war in Iran, the Scottish Fiscal Commission – Scotland’s independent fiscal institution that I Chair – was forecasting growth of just 1.4 per cent per year on average over the next Parliament.
The growth in living standards has been even more modest. In the decade before the financial crisis, real incomes per person in Scotland grew by close to 3 per cent annually. Since 2008, growth has averaged below 1 per cent and is expected to remain there for the foreseeable future.
With fiscal devolution, all this matters for the Scottish Budget. How Scotland’s economy is performing – and crucially how it is doing relative to the rest of the UK – directly impacts tax performance (and therefore funding). On income tax – the largest devolved revenue source beyond the block grant – Scotland’s tax base has tended to grow more slowly than the rest of the UK. The Scottish Fiscal Commission estimates that weaker earnings and employment growth have created an ‘economic performance gap’, worth around £800 million in 2026–27 alone.
Overall, the Scottish Government’s resource – i.e. day-to-day – budget is projected to grow by just over 1 per cent per year in real terms over the next Parliament. With rising demand for health and social care, persistent challenges in education, and ambitious targets to reduce child poverty, the next government will face difficult trade-offs. Plans to deliver efficiency savings and reduce the size of the public sector workforce reflect the scale of that challenge. Even with such reforms, core areas of public spending – with the exception of health and social security – will need to meet increased demands with fewer resources.
Long-term fiscal sustainability
These near-term pressures are significant. But even deeper challenges lie in the long-term outlook for Scotland’s public finances.
As the Scottish Fiscal Commission has highlighted, for example, demographic change will reshape the fiscal landscape. In Scotland, the number of people aged 65 and over is projected to rise by more than 20 per cent over the next decade. These pressures are expected to be more acute – and to emerge earlier – than in the UK as a whole.
An ageing population increases demand for health, social care and disability spending – areas where the Scottish Parliament now has substantial responsibility. Combined with Scotland’s historically higher levels of ill-health, the pressures on the public finances will intensify.
In such a context, the key question for the next Parliament is not simply how to manage annual budgets, but how to put the public finances on a sustainable path over the longer term.
What needs to happen
A useful starting point is the need to develop a more systematic focus on long-term fiscal sustainability within the budget process.
The Scottish Parliament’s Finance and Public Administration Committee has been clear that current arrangements fall short. Its recent legacy report argues that there is a lack of persistent long-term financial planning. The cross-party Committee called for a much stronger emphasis on medium- and long-term strategy, supported by more robust data, clearer prioritisation of spending, and greater transparency.
This requires a shift in how budgets are debated and scrutinised. In order for this to have an impact, there will need to be deeper analysis of trade-offs within policy decisions, more clarity on how resources are prioritised, and a stronger focus on fiscal risks. It will require improvements in the quality and timeliness of key financial documents, particularly those relating to medium- to long-term planning, to support more effective parliamentary scrutiny.
It also requires a change in culture and knowledge. Scotland’s new fiscal powers were transferred rapidly. But research suggests that levels of fiscal literacy in these new powers – among policymakers and the wider public – remain limited. Investing in improving understanding of how the budget works, and the constraints within it, is a prerequisite for more informed debate about priorities.
Taken together, this points to the need to work to establish a more mature fiscal framework in Scotland: one that is more transparent, more focused on the long term, and better equipped to support difficult decisions.
The next group of MSPs will face no shortage of immediate pressures. But their legacy will depend on whether they can also begin to address the structural challenges in Scotland’s public finances – and put in place the processes needed to sustain them over the decades ahead.
About the author
Graeme is Professor of Economics, Deputy Head of the College of Social Sciences and Assistant Vice Principal at the University of Glasgow. He is also currently interim Head of the Adam Smith Business School. Graeme is Chair of the Scottish Fiscal Commission, Scotland’s official independent economic and fiscal forecaster. Prior to joining Glasgow in March 2021, he was Director of the Fraser of Allander Institute at the University of Strathclyde. Graeme is also a former Senior Civil Servant in the Scottish Government, where he was Head of the First Minister’s Policy Unit. Graeme’s research focus is on economic policy and devolution. He is a regular commentator on the Scottish economy, including a column for The Herald newspaper.
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