Scotland's fiscal outlook: medium-term financial strategy

Executive Summary

The Scottish Government’s seventh Medium-Term Financial Strategy (MTFS) provides the economic, funding and spending outlooks for the financial years 2025-26 to 2029-30. It also presents the Government’s fiscal strategy to deliver sustainable public finances, within the current constitutional settlement.

The outlooks presented in the MTFS are informed by the latest Scottish Fiscal Commission (SFC) economic and fiscal forecasts, published on 29 May 2025 and updated on 25 June 2025. Global economic uncertainty, increasing geopolitical tensions, and the volatility we will see in the projections due to the operations of the Fiscal Framework with the UK Government, mean the projections do have their limitations. Nonetheless, this analysis is based on the information we have available, drawing on data and modelling, and is intended as a guide to support financial planning.

The UK Spending Review (UKSR) announcements on 11 June 2025 set the UK Government’s resource departmental budgets until 2028-29 and capital departmental budgets until 2029-30. The MTFS reflects the impact of these announcements on Scotland’s funding position, but it is not in itself a spending review for Scotland. Specific funding, spending and investment decisions will continue to be taken at the annual budget and as part of a Scottish Spending Review.

Conclusions of the Scottish Spending Review, setting out indicative resource spending plans to 2028-29, and capital spending plans to 2029-30, are due to be published alongside the 2026-27 Scottish Budget, expected in December 2025. An updated infrastructure investment pipeline will also be published; providing clarity over the infrastructure projects and programmes that will be prioritised in the medium term.

A Fiscal Sustainability Delivery Plan (FSDP) is published alongside the MTFS this year, bringing together the actions from across Government to deliver fiscal sustainability under the three pillars of the Government’s medium-term strategy.

Economic Outlook

Rising energy prices, inflation, and growing geopolitical instability contribute to an uncertain outlook. This follows on from a relatively subdued end to 2024, with consumer confidence, business activity and optimism declining. There have been encouraging signs for Scotland’s economy at the start of 2025, with Scottish Gross Domestic Product (GDP) growing 0.4 per cent in the first quarter of 2025, picking up from 0.1 per cent growth in the final quarter of 2024, buoyed in particular by the Services and Production sectors^[1]. The Scottish labour market remains robust with unemployment at 4.2 per cent^[2] and earnings continuing to grow faster than inflation.

Fiscal Outlook

The fiscal and economic environment poses considerable challenges to Scotland’s public finances. Whilst the UK Government reset of Scotland’s funding in 2024-25 was welcomed, growth in overall funding for Scottish Government from the total UK Block Grant is only set to increase by 0.8 per cent per annum in real terms over the outlook period, with overall resource (day-to-day) funding growth of only 1 per cent per annum in real terms.

Day-to-day government spending, however, continues to face pressures from growing demand for public services and the cost of achieving statutory net zero and child poverty targets. The devolved public sector wage bill is also a significant driver of projected costs, recognising the proportionately larger and better paid public sector in Scotland. This is due to investment that Scottish Government has made in our workforces over many years, however, the wage bill needs to be more sustainable going forward. Spending pressures in health and social care are particularly acute. Measures to achieve efficiency savings and reforms, as set out in Chapter 4 and in the FSDP will be essential to constrain this growth in spending to affordable levels while protecting the public services and social security this Government provides.

Overall, slower growth in projected resource funding relative to estimated spending illustrates the scale of the challenge. Without action, the difference between projected funding and estimated spending is set to grow from a balanced budget in 2025-26, to £2.6 billion in 2029-30.

*Source: UK Spending Review up to 2028-29.

For capital, the outlook is also challenging. Capital funding is set to be lower in nominal terms in 2029-30 than in 2025-26. Within this, the capital Block Grant, excluding Financial Transactions (FTs), is expected to decrease by 1.1 per cent in real terms between 2025-26 and 2029-30. This real-terms reduction is compounded by the real-term cuts in previous years and sustained high levels of inflation which have reduced our spending power. The funding provided in the form of FTs is set to grow over the outlook period, providing some opportunities to support the Government’s investment programme.

Our capital spending supports investment in new and renewed public sector assets and networks, which are required to deliver our priorities – such as Heat in Buildings, Affordable Housing and public transport. The increasing spending outlook over the period reflects the Scottish Government’s ambitions across a number of policy areas as well as the scale of construction price inflation and ageing assets.

Without further action, capital spending is forecast to exceed our available budget by £1.1 billion in 2026-27, rising to £2.1 billion in 2029-30.

*Source: UK Spending Review up to 2029-30.

Whilst the UKSR provided some certainty in relation to Scotland’s Block Grant allocation over the next three to four years, there remains a level of uncertainty, including the impact of decisions that the UK Government may make on reversing the two child cap on Universal Credit and the pace and scale of reforms to the Personal Independence Payment. Wider sources of uncertainty and risk to the funding and spending outlooks include broader global volatility, which could impact the overall level of public spending UK-wide and the cost of delivering services.

Despite representations to the UK Government through the UKSR, the Scottish Government has limited borrowing powers and operates within a fixed budget framework, making it harder to respond flexibly to fiscal shocks. It appears that the UK Government also intend to continue using the Internal Market Act to deliver its local growth funding programme, bypassing the Scottish Government. This will constrain our ability to target investment in a way that maximises impact and economic benefit.

Fiscal Strategy

The MTFS responds to the scale of the fiscal challenge that we face, with further detail set out in the FSDP. The strategy remains focused around the public spending, economic growth, and taxation pillars first set out in the 2023 MTFS, and these have been updated to recognise where progress has been made and where additional focus is needed.

Box ES.01: Three pillars of the 2025 Medium-Term Financial Strategy

Pillar 1: Ensuring public money is focused on delivering government objectives, underpinned by reform and prioritisation to maximise impact.

Pillar 2: Supporting sustainable, inclusive, economic policies with the greatest potential to grow Scotland's economy, expand and broaden the tax base to fund public services.

Pillar 3: Ensuring a strategic approach to tax revenues, which considers the longer-term impact of our tax choices and competitiveness.

Considerable progress has been achieved since 2023 to strengthen the public finances. Actions across the 2024-25 and 2025-26 Programmes for Government (PfG) and associated Scottish Budgets have streamlined commitments and prioritised spending, strengthened policy action to underpin economic growth, enhanced the tax take, and ensured a balanced budget each year.

Improving the public finances requires effort across the public sector over the medium to long-term. The FSDP sets out the key actions we are taking to constrain the rate of growth in public spending and maximise the impact of economic and tax performance over the next five years.

Our strategic approach to public spending is closely integrated with the Government’s Public Service Reform (PSR) Strategy^[3], published on 19 June 2025. We will target day-to-day spending on delivering government objectives and ensuring high quality public services, underpinned by reform and prioritisation to maximise impact.

Under the Public Spending Pillar, the FSDP sets out four measures: increasing public value, efficiencies and productivity, service reform, and prevention. It focuses on the main drivers of public spending, delivering significant savings through:

• A devolved public sector workforce downward trajectory of an average 0.5 per cent reduction per annum over the five years with savings growing from £0.1 billion to £0.7 billion per annum over the five years, whilst protecting frontline services;
• Wider public sector efficiencies and productivity, reform, and revenue raising, with savings growing from £0.6 billion to £1.5 billion per annum over the five years;
• Increasing public value, to be set out in the Scottish Spending Review, with a savings target of between £0.3 billion and £0.7 billion per annum over the five years.

While we recognise the wider context, notably UK Departments being required to deliver at least 5 per cent savings and efficiencies by 2028-29, and to reduce administrative budgets by at least 16 per cent in real terms by 2029-30, the measures above will be taken forward in a balanced way, ensuring funding is allocated fairly to deliver our core priorities. This will be reflected in the Scottish Spending Review published later this year.

Economic growth is a government priority with the latest package of policies and activities that this Government will deliver set out in the 2025 Programme for Government. Our range of economic interventions are set out in the National Strategy for Economic Transformation^[4], Innovation Strategy^[5], Green Industrial Strategy^[6], and 2024^[7] and 2025^[8] Programmes for Government. We are focused on increasing aggregate business activity, employment and wages, to grow the economy, and expand and broaden the tax base.

‘Scotland's Tax Strategy: Building on our Tax Principles’^[9] sets out this government’s approach to developing tax policy, ensuring the tax system raises the revenue needed to achieve our priorities, and supports our growing economy. Two of the key measures that will support fiscal sustainability are improving the operation and performance of the existing tax system, and future reform to deliver sustainable and growing tax revenues.

We welcome the findings of the recent Organisation for Economic Co-Operation and Development (OECD) review which recognised the critical role of the Scottish Fiscal Commission in supporting transparency over the public finances and analysis of fiscal sustainability and risks. We look forward to working closely with the Commission as they consider the OECD’s recommendations and means to further strengthen their impact.

We continue to press the UK Government to work collaboratively to maximise economic benefit through closer collaboration over reserved and devolved policy development and investment decisions. We continue to seek increased fiscal flexibilities, enabling the Scottish Government to better manage volatility, achieve a fair share of the FTs budget allocations and secure parity of treatment across our public bodies.

Delivering the MTFS and the accompanying actions in the FSDP requires appropriate governance, monitoring and evaluation arrangements. We will include progress updates in future MTFS publications.