Higher public sector pay in Scotland is having a “significant effect” on the Scottish Government’s budget, the Scottish Fiscal Commission has warned.
The Scottish Government’s independent economic and fiscal forecaster said there is considerable uncertainty over the Scottish Government’s funding for 2024-25 ahead of the UK Budget on 30 October. But it said: “While UK government policies contribute to the pressures on the Scottish budget, much of the pressure comes from the Scottish Government’s own decisions.”
The commission – which is the Scottish equivalent to the UK’s Office for Budget Responsibility – said higher-than-budgeted pay rises led to the Scottish Government needing to introduce emergency spending controls earlier this month.
It said the average public sector pay award in Scotland 2023-24 was 6.5%, three percentage points higher than the Scottish Government had estimated in May 2023. And it said 2023-24 pay accounted for more than £25bn of day-to-day expenditure, more than half of its resource budget.
The failure to anticipate higher pay rises has meant the government has needed to scale back its planned spending on public services, the watchdog said.
“If a budget is set based on pay assumptions which are lower than those that materialise, this creates challenges with in-year management of the budget, requiring the government to reduce its planned spending on services,” the commission’s August fiscal update report said. “The recent emergency spending controls the Scottish Government has put in place for 2024-25 are the result of those challenges.”
Other commitments such as a council tax freeze in 2024-25 and social security reforms have also increased pressure on the Scottish budget, the commission said.
The commission’s chair, Graeme Roy, said: “The past choices of the Scottish Government narrow its room for manoeuvre now and in the future. Previous pay settlements, the approach to social security payments, and the council tax freeze have all added to the in-year pressures that must be accommodated as it continues to negotiate pay with the public sector unions.
“With pay making up more than half of the Scottish Government’s day-to-day budget, we need more transparency and planning around pay awards at budget time to avoid disruptive spending controls being introduced part way through the year.”
Earlier this month, Shona Robison, the Scottish Government’s finance secretary, put emergency spending controls in place, with any further spending in 2024-25 only permitted if it is “truly essential or unavoidable”.
Robison said the funding Scotland receives from the UK government would not cover upcoming pay rises and that around a third of the total needed for the pay packages this year will have to come from departmental cuts.
In a letter to the Scottish Parliament's finance committee last week, she said additional measures would be necessary on top of the emergency spending controls because of “the UK Treasury’s recent audit of public spending and lack of clarity over whether their decision to deliver pay review body recommendations will be fully funded”.
When confirming the government would accept pay review body recommendations in July, Reeves government departments would be expected to “find savings to absorb as much of this as possible”.
And following Keir Starmer's Rose Garden speech yesterday, which warned the upcoming Budget would be painful, Robison said "the political choices being made by the new UK government will fundamentally damage our ability to deliver public services in Scotland".
On looming budget pressures, the commission said there has been no significant confirmed change to the Scottish Government’s funding since December 2023, “but the pressure on spending has increased with public sector pay offers in Scotland now coming in higher than the pay policy published in May 2024”.
The multi-year framework set out a recommended pay rise of 3% for 2024-25. The commission said the Scottish Government has since made offers of 4.27% for local authority workers and 5.5% for nurses and NHS workers, which “is likely to create pressure for other pay awards to be higher than the Scottish Government had planned for”.
It said the Scottish Government is “also likely to be under pressure to at least match UK pay awards”, which have been around 5-6% for areas covered by pay review bodies.
The watchdog warned that the trend of Scottish public sector pay rises being higher than in England has made each subsequent pay adjustment more costly. As public sector pay is already higher in Scotland than in England, matching or exceeding pay rises offered by the Westminster government would result in greater pressure on Scottish budgets.
Giving an example, the commission said: “If teachers in Scotland are more highly paid than in England, then an equivalent percentage rise in teacher salaries will be more costly to implement in Scotland. This further contributes to the pressures of public sector pay on the budget.”
The commission also warned that ahead of the publication of the 2025-26 budget, the Scottish Government will “need to make difficult decisions to balance the budget and ensure decisions now are sustainable in the future”.