The Scottish government could be forced to reconsider spending pledges to provide free university places and free personal care for older people in light of a squeeze on payments from the UK Treasury over the next two years, according to analysis by the Institute for Fiscal Studies.
The thinktank said the Scottish National party administration would face “difficult trade-offs” if it pursued plans to increase health spending and meet net zero climate targets from a budget adjusted for inflation that is on course to shrink.
It said other public services could be required to cut about 13% from their budgets between 2023 and 2027 if the health and climate policies remained in place.
The SNP government’s assumptions that the income of Scottish households and businesses will grow at a faster rate than their English counterparts over the next five years, boosting tax revenues by more than Westminster forecasts, also put Scotland’s planned spending at risk, according to the IFS.
“If this faster growth doesn’t materialise, then the Scottish government’s choices would be harder still, with funding for non-benefits spending in 2027–28 still 5% below 2022-23 levels,” the report said.
Scotland has benefited from a decade of transfers from the Treasury under the system known as the Barnett formula. It decides the share of public spending allotted to different UK nations, enabling Edinburgh to protect services from the austerity pursued by successive Tory governments.
Spending per person reached 125% of that in England last year after top-ups by the Barnett formula, cushioning spending cuts that affected English regions. However, the IFS said spending increases agreed by the chancellor, Jeremy Hunt, in the autumn budget to protect services from high inflation would not be fully passed on to the Scottish administration.
The outlook over the next 30 years shows the amount spent per person in Scotland could fall to 115% of England’s figure.
To maintain services and support the NHS, Scotland’s acting finance secretary, John Swinney, said in December that income taxes would rise from 41p to 42p in the pound for people earning more than £43,666, and from 46p to 47p for those earning more than £125,140.
“The extra penny is being raised for a specific purpose,” Swinney told MSPs. “It is an extra penny to ensure patient care in our National Health Service.”
The report said higher taxes would not fully offset Barnett cuts and funding would fall by 1.6% in real terms in 2023–24 compared with this year. Even after adjusting for major one-off costs this year, such as council tax rebates that Westminster has agreed for the whole of the UK, the reduction would still be 0.8%.
“While the Barnett formula is often thought to benefit Scotland, in the long term it is likely to lead to relatively smaller increases in funding for Scotland than for England,” the report said.
The speed of this “Barnett squeeze” depends on the rate of growth in spending in England (both real-terms growth and that which merely offsets inflation), and the rate of population growth in Scotland relative to England.
David Phillips, an associate director at the IFS, said the Barnett squeeze would make it harder for the Scottish government to meet rising costs and the demands on public services associated with an ageing population, “and to maintain enhanced service provision relative to England, such as free personal care and free university education, in the longer term”.
