Scotland's fiscal outlook: medium-term financial strategy

Chapter 4: Our strategic approach to the public finances

In 2023, we set out our strategy aimed at ensuring we continue to deliver a balanced budget each year alongside strengthening the public finances over the medium term. Recognising the limited fiscal powers the Scottish Government has, the strategy was built around the three pillars of public spending, economy, and tax. These are the key areas where we have some level of influence over policy choices to mitigate known fiscal pressures and prepare for future shocks.

This year, we are reinforcing our commitment to deliver the strategy, ensuring the public finances remain sustainable over the medium term, to support delivery of this Government’s priorities. We retain the focus on the three pillars (Box 4.01), updating them to recognise where progress has been made and where further action is needed.

As previous chapters have set out, the fiscal and economic environment is very challenging and is likely to remain so into the foreseeable future. Our MTFS reflects this and recognises that fiscal sustainability must be a core part of our drive across government to improve outcomes for the people of Scotland, by changing how we deliver services, protecting our natural environment, and reducing inequalities.

In recognition of this, we are strengthening our approach by publishing a Fiscal Sustainability Delivery Plan alongside the MTFS. The FSDP brings together the range of activity currently underway, and further actions this Government will take, to deliver the fiscal strategy.

All three pillars of the strategy play an important role in strengthening the public finances. In the short to medium term, the most immediate lever by which we can improve fiscal sustainability is in public spending and this is reflected in the scale and scope of activity under this pillar.

Box 4.01: Three pillars of the 2025 MTFS

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.

4.1 Pillar 1: Public Spending

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

4.1.1 Achievements since 2023

Considerable work has been undertaken since the 2023 MTFS to ensure public finances are focused on delivering the Scottish Government’s priorities, underpinned by public sector reform. Actions across the 2024-25 and 2025-26 Programmes for Governments and associated Scottish Budgets have streamlined commitments and prioritised spending, while ensuring a balanced budget each year.

Achievements include:

• Ensuring citizens are protected from rising living costs by maintaining free prescriptions and eye examinations; free bus travel for 2.3 million people; free university tuition for Scottish students; free early learning and childcare support for all three and four year olds, and a social security system based on dignity and respect.
• The 2025-26 Scottish Budget delivered a record increase in frontline NHS spending; set out plans to lift 15,000 children out of poverty through the Two Child Limit Payment to mitigate the UK Government’s actions; allocated funding for universal winter heating payments for older Scots, and £4.9 billion of action on the climate and nature crises.
• Driving efficiencies within government and the wider public sector through programmes such as National Collaborative Procurement; Single Scottish Estate; and Commercial Value for Money of Grants, to secure cost avoidance and nominal releasing savings which are expected to reach £280 million by the end of 2024-25.

We have delivered major capital projects in transport, health and justice since 2023, despite real-terms cuts to our capital budget, including:

• Reopening of a passenger railway in Levenmouth; completion of the New East Linton Rail station; and electrification of Barrhead railway line, improving economic and green travel opportunities.
• A Health and Social Care Hub facility at Parkhead; a Surgical Centre at Clydebank, and a new Cancer Assessment Unit and oncology ward at the cancer centre in the Western General Hospital.
• A National Facility for Women Offenders, situated in Stirling, and improvement works at HMP Barlinnie.

4.1.2 Our strategy

Building on our 2023 aim to focus spending on our priorities, our approach is based on four key measures (Box 4.02) and is closely integrated with the recent Public Sector Reform Strategy (June 2025). Improving the public finances requires effort right across the public sector, over the medium to longer term. This year, we are setting out the level of savings we aim to make across key areas over the medium term. By making these savings, we will strengthen our ability to make positive investments in our priorities while mitigating the fiscal risks we face.

Box 4.02: Four key measures to ensure public money is focused on delivering government objectives, underpinned by reform and prioritisation to maximise impact

1. Increasing public value – ensuring funding is fully focused on delivering the Scottish Government’s priorities and maximising the impact of available investment. This includes identifying and prioritising higher impact spending; considering options for public bodies to more effectively raise revenue, and improving the evidence base for existing spend and new spend proposals, to drive up public value from spending through the Scottish Government Centre of Expertise on Appraisal and Evaluation.

2. Efficiencies and productivity – driven through the PSR Strategy and aligned with a public sector workforce reduction target. This includes focusing on business improvement and increased productivity through workstreams such as scaling intelligent automation, service redesign, and reviewing the public service delivery landscape.

3. Service Reform – changing the way we deliver services to secure the same or better outputs for lower cost in the longer term, enabled and driven through the PSR Strategy and reform programmes already in train. This includes actions in Health and Social Care service reform, Social Security benefits, Justice reform, Education and Skills reform and joined up models of service delivery for those most in need.

4. Prevention – investing in the most impactful preventative spend to reduce service demand in the medium to long term. This includes actions to tackle child poverty and poverty more generally, homelessness, supporting young people not to enter the criminal justice system, minimising reoffending, and the actions under the Population Health Framework.

The Scottish Spending Review (SSR) delivers our strategic approach to public spending, allocating multi-year budgets to deliver the core priorities of this government. The SSR will set out the contribution expected from individual Scottish Government portfolios, and specific policy measures that will be taken to achieve savings. We intend to publish the conclusions of the SSR alongside the 2026-27 Scottish Budget. The SSR Framework is included in Annex E and sets out the Scottish Government’s approach and timeline to the Spending Review.

The SSR will reflect the overall envelope confirmed by the UK Government for spending by the Scottish Government in both resource and capital. Our public spending approach set out above will ensure that funding is allocated in a fair and proportionate way, while recognising the wider context, with all UK departments required to deliver at least 5 per cent savings and efficiencies by 2028-29 and reductions in administration budgets of at least 16 per cent in real terms by 2029-30.

The Cabinet Secretary for Finance and Local Government intends to publish the infrastructure investment pipeline reset in December 2025, alongside the 2026-27 Budget and the Scottish Spending Review. This will provide clarity over the projects and programmes that will be prioritised in the medium term. In addition, we will set out our long-term trajectory for infrastructure in the next Infrastructure Investment Plan.

Our strategic approach and measures focus on the key drivers of public spending outlined in Chapter 3. These are as follows:

• Pay and Workforce: planning for a managed downward trajectory for the devolved public sector workforce of 0.5 per cent on average per annum over the next five years, as part of a shift in workforce plans and operating models because of service re-design, automation, process improvement, re-prioritisation, mergers, and shrinking corporate functions. Frontline services will remain protected as this is taken forward.
• Health and Social Care: we will continue to focus on delivering efficiencies and service reform, through the NHS Operational Improvement Plan^[54], the Population Health Framework^[55], and the Health and Social Care Service Renewal Framework^[56]. We have a commitment to delivering 3 per cent recurring savings against core funding for NHS Boards, supported by a continuous programme of efficiency and productivity improvement. This will be done while ensuring all Health resource consequentials from the UK Government are passed on in full.
• Social Security: we will protect the current benefits offer while improving the efficiency of how we deliver benefits through improving communication to clients, investment in digital and automation of some payments, and continuing to pursue initiatives which increase the ability to tackle fraud and error where it does occur. We will also consider improvements to the way we manage reviews of clients awards.

4.2 Pillar 2: Economic Growth

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

4.2.1 Achievements since 2023

Many of the levers that influence macroeconomic activity are reserved to the UK Government. This includes, but is not limited to, monetary and fiscal policy, employment law, and non-devolved taxation. In these areas we rely on the UK Government making the right decisions to enable growth in Scotland.

The UK Government’s current approach to immigration is an example of where failure to address Scotland’s distinct demographic and economic needs exacerbates labour supply issues. We have taken action where we can to address this, including launching Scotland’s Migration Service in 2024, which helps employers navigate the UK immigration system to fill their skills and labour gaps.

While we are not in full control of all economic levers, growing the economy is a priority for this government, and we are taking action to leverage our significant strengths and opportunities, to boost Scotland’s long-term economic prospects. We have prioritised policies and actions with the greatest potential to grow Scotland's economy, now and for the long term.

The National Strategy for Economic Transformation^[57] set out our long-term objectives to create a fair, green and growing economy. Three years into its 10-year delivery, we have achieved 39 per cent of our actions. These include:

• Over 74,000 connections delivered through the Reaching 100% (R100) broadband programme;
• Employability support provided for almost 72,000 people (between April 2022 to September 2024);
• Investment in our enterprise agencies in 2023-24 enabled Scottish Enterprise to support the creation or safeguarding of over 16,700 jobs and help companies unlock a record £1.89 billion planned capital investment.
• Fair Work conditionality applied to over £2.6 billion of public sector grants (between July 2023 and March 2024).

Our National Innovation Strategy^[58] (June 2023) sets out our vision for Scotland to be one of the most innovative small nations in the world and identifies the sectors in which Scotland’s research and business base provides competitive advantage.

Our Green Industrial Strategy^[59] (September 2024) sets out the economic growth opportunities for Scotland from the global transition to net zero with targeted actions to secure growth and investment; and our Natural Capital Market Framework^[60] (November 2024) support values-led investment in natural capital.

Planning is key to unlocking new investment opportunities. We launched Scotland’s Planning Hub with an initial focus on hydrogen planning applications and we are building on this progress to support wider developments, including good quality homes and onshore wind.

4.2.2 Our strategy

Our main economic interventions to support economic growth and fiscal sustainability are set out in the National Strategy for Economic Transformation, Green Industrial Strategy, and the 2024^[61] and 2025^[62] Programmes for Government. The fiscal strategy focuses on the areas set out in Box 4.03 – delivered through economic interventions that are expected to grow the economy and expand and broaden the tax base.

Box 4.03: Three key measures to support economic growth, and expand and broaden the tax base

1. Increasing aggregate business activity – supporting Scottish businesses and making it easier to do business by providing regulatory certainty and stability.

2. Increasing employment levels – improving access to good, well-paid employment and attracting investment to start new and grow existing employment opportunities in Scotland.

3. Increasing average wages – improving skills and attracting and retaining high-wage sectors in Scotland.

Increasing aggregate business activity

By supporting businesses, we drive economic growth through job creation, increased innovation and investment, supply chain expansion, and trading and exports. Scotland has a thriving start-up ecosystem and excels in disciplines such as AI, life sciences and green technologies that carry transformational economic potential. Actions include developing business clusters in innovative markets; building on Scotland’s expertise in critical technologies; boosting Scotland’s profile as a modern, high-growth country and ensuring we sell our expertise on an international stage and attract inward investment.

Increasing employment

Scotland’s population is ageing earlier than the rest of the UK. Increased demand for services and a proportionally smaller labour force creates challenges for the fiscal environment. With unemployment consistently low, a focus on boosting the size of our workforce by removing barriers to work and reducing economic inactivity is essential. Supporting those with long-term health conditions and disabilities to remain in, sustain and progress in work will have positive impacts for an older working age population. Our devolved employability programmes provide person-centred, place-based support. Our focused action to improve health and work services and promotion of fair and flexible working practices, supports a multi-sector approach. Our early learning and childcare offer improves outcomes for children and supports access to work, training or study for parents and carers. The Programme for Government sets out further actions including recognition of prior learning, skills needs in priority sectors and support for self-employment and entrepreneurship.

Increasing average wages

Increasing average wages supports improved living standards and reduces poverty. Wage growth is also critical to fiscal sustainability through higher tax revenues and increased spending power. We are supporting innovation and high-wage sectors in Scotland to create and expand opportunities for high-wage employment. We are ensuring people have the skills they need throughout their lives to enter and remain in productive work, and secure higher wages, through reform of our post-school education and skills system. Our Fair Work First approach includes promoting flexible and family-friendly working practices, and increasing the number of employers who pay at least the real Living Wage. The changes associated with this movement aim to reduce the number of people living in poverty, raise living standards and encourage people to progress in work.

4.3 Pillar 3: Taxation

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

4.3.1 Achievements since 2023

Since the devolution of greater tax powers, the Scottish Government has delivered a fair and progressive tax system by embedding our distinctive and ambitious Scottish approach to taxation in our policy choices. This has raised significant revenue with the limited tax powers that we have available, helping to pay for a range of services and social security payments that are not available elsewhere, such as the Scottish Child Payment and free prescriptions. The decisions the Scottish Government has made on Income Tax since devolution – distinct from those made by the UK Government – are estimated to have raised up to £1.7 billion in 2025-26 when compared to if we had implemented the same rates and bands as in the rest of the UK.

Since 2023, progress to ensure a strategic approach to taxation includes:

• Publishing ‘Scotland's Tax Strategy: Building on our Tax Principles’ (December 2024). This sets out the steps that will underpin this government’s approach to developing tax policy, ensure the tax system raises the revenue needed to achieve our priorities, and support our growing economy.
• Setting up a Tax Advisory Group^[63], and providing a set of ready reckoners for all devolved taxes with Budgets in December of 2023 and 2024.

In the 2025-26 Scottish Budget we supported lower-earning taxpayers while continuing to raise the revenue needed to protect our investment in public services. Our decisions:

• Ensured most taxpayers continue to pay less than in the rest of the UK, by raising Basic and Intermediate rate thresholds by 3.5 per cent, which reduced forecast revenue by £24 million in 2025-26.
• Maintained Higher, Advanced, and Top rate thresholds at current levels, raising £76 million in 2025-26.

The net impact of these decisions was to increase the Scottish Budget by an estimated £52 million in 2025-26, protecting and building on revenues already raised as a result of our policy choices.

On Non-Domestic Rates, decisions made in the 2025-26 Scottish Budget maintained a competitive non-domestic rates regime, estimated to raise over £3 billion to help fund local services. The Basic Property Rate (for properties with a rateable value up to and including £51,000) was frozen at 49.8 pence in 2025-26, delivering the lowest such rate in the UK for the seventh year in a row. Over 95 per cent of properties in Scotland (those with a rateable value up to and including £100,000) are liable for a lower property tax rate than anywhere else in the UK. We also continued to support businesses and communities with a competitive Non-Domestic Rates relief package worth an estimated £733 million in 2025-26.

On Land and Buildings Transaction Tax , we maintained the main LBTT rates and bands at their existing levels, and continue to make First-Time Buyer Relief available. We raised the Additional Dwelling Supplement from 6 per cent to 8 per cent with effect from 5 December 2024, supporting the Scottish Government’s commitment to protect opportunities for first-time buyers in Scotland. In the May 2025 publication ‘Scotland’s Economic and Fiscal Forecasts’, the SFC forecast that this change will raise £30 million in additional revenue in 2025-26.

On Scottish Landfill Tax, we chose to match the above-inflation increase in UK Landfill Tax rates. This avoids the risk of waste tourism which would exist if one nation in the UK had a substantially lower rate of tax. The increased rates are forecast to raise an additional £6 million in 2025-26.

4.3.2 Our strategy

A stable tax system allows taxpayers to better manage their finances and helps businesses to plan and make investment decisions with confidence – while also allowing time to assess the impacts of previous policy changes.

‘Scotland's Tax Strategy: Building on our Tax Principles’^[64] (the ‘Tax Strategy’) 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 considered in further detail in the FSDP (Box 4.04).

Box 4.04: Two key measures to ensure a strategic approach to tax, and consider the longer-term impacts of tax choices

1. Priorities to improve the operation and performance of the existing tax system – in addition to stability for Income Tax as noted above, key areas of focus include working with Local Government, and completing the devolution of remaining taxes.

2. Future tax reform to deliver sustainable and growing tax revenues – exploring opportunities for reform and devolution of tax powers needed to continue to deliver sustainable and growing tax revenues in the future.

Our priorities for the existing tax system include working with Local Government and completing the devolution of remaining taxes.

Working in partnership with Local Government will enable us to ensure that local taxes are fair, inclusive and fiscally sustainable, and to explore the creation of more revenue-generating powers for local authorities.

Completing the devolution of remaining taxes is a key strategic priority for the Scottish Government. They will grow our tax base, increase the number of taxes collected and managed by Revenue Scotland, add to the accountability and fiscal powers of the Scottish Government, and demonstrate our ability to make good tax policy and legislation.

The Scottish Parliament has passed legislation for both the Scottish Aggregates Tax (SAT) and Air Departure Tax (ADT). The Aggregates Tax and Devolved Taxes Administration (Scotland) Act received Royal Assent on 12 November 2024. The SAT will come into force on 1 April 2026.

We are working with the UK Government to arrive at a solution for a Highlands and Islands exemption for ADT that protects connectivity and complies with subsidy control legislation. We have published the principles^[65] that will inform further policy development, in line with the commitment set out in the Climate Change Action Policy Package in April 2024. We will engage with stakeholders to discuss how these principles will help shape ADT policy development.

We have also secured powers to create a new tax to fund building safety expenditure. The Building Safety Levy (Scotland) Bill was introduced on 5 June 2025 and the Levy is expected to come into force on 1 April 2027. When operational, the Levy will provide vital funding for action on cladding remediation.

Following the conclusion of the Fiscal Framework Review in August 2023, the Scottish and UK Governments have agreed to explore options for the future of VAT Assignment. We will take forward exploratory work, in line with our Tax Strategy principles, on options including full VAT devolution.

We plan to undertake a range of actions to examine the opportunities for future reform and further devolution of tax powers needed to continue to deliver sustainable and growing tax revenues in the future. The priority areas are set out in the FSDP and include work to learn from other countries to better understand different devolved arrangements internationally and the potential for the devolved tax system to encourage positive behavioural change; further analysis of existing evidence on the sustainability of our taxes, and actions undertaken by Revenue Scotland to increase understanding of fully devolved taxes and to streamline and ensure efficient tax collection.

4.4 Wider supporting actions

There are a range of areas where we will take forward further work as part of our MTFS. These are important underpinning elements to our work on fiscal sustainability.

4.4.1 Fiscal Framework

As set out in Chapter 2, the first review of Scotland’s Fiscal Framework was published in August 2023. The Scottish Government outlined the changes secured through the review and their benefits alongside the 2024-25 Scottish Budget^[66].

The authors of the Independent Report, jointly commissioned by the Scottish and UK Governments ahead of the Fiscal Framework Review, estimated that the ongoing use of the Indexed Per Capita methodology for calculating Income Tax Block Grant Adjustments alone could be worth around £500 million a year by 2026-27, when compared with other methodologies that were considered.

The Fiscal Framework agreement calls for a formal review every five years with the next review due to take place in 2028. However, in view of the issues set out in Chapter 2 including low borrowing limits in the context of the overall size of the Scottish Budget, and the restrictions on reserve limits, the Scottish Government has called on the UK Government to agree to an earlier review.

4.4.2 Areas of engagement with the UK Government

The Scottish Government sought engagement with the UK Government in the lead up to the UKSR across a range of priorities. We called for the UK Government to bring forward the funding required to put public services on a sustainable path and deliver the investment needed but the settlement fell short of our expectations for both resource and capital.

We were optimistic that the reset in relations promised by the UK Government would be built on through the UKSR but Ministerial engagement with Treasury was limited. Despite this, we approached our input to the UKSR in a cooperative spirit and were pleased to see progress on the Acorn Project and a change in approach on the Winter Fuel Payment.

The Scottish Government welcomes the UK Government’s £200 million commitment for the Acorn carbon capture project to bring it to a Final Investment Decision during this UK Parliamentary session. Further significant investment of circa £10 billion to £12 billion will be required for the delivery stage and that will not be considered until the next UKSR. The Scottish Government is now working with Acorn and the UK Government on next steps and where it can offer support. On welfare, we are seeking further detail on the policy and the way in which the funding model for the Winter Fuel Payment can be reconciled with the Fiscal Framework.

More broadly, we have set out in correspondence ahead of the UKSR, the capabilities that Scotland has to contribute to the Chancellor’s growth ambitions, and what action is needed by the UK Government spanning artificial intelligence, offshore wind, hydrogen, carbon capture and storage, cross-border infrastructure, and tailored migration routes. While there has been marginal progress through the UKSR, we continue to press the UK Government to deepen cooperation and work collaboratively to maximise economic benefit through aligning reserved and devolved actions. We are disappointed that there remains a lack of clarity over the approach to local growth funding and continue to emphasise the need for the Scottish Government to have a role in its design and delivery.

The UKSR should have been an opportunity to improve the ways that the UK and Scottish Governments interact on financial matters. We continue to seek increased fiscal flexibilities, enabling the Scottish Government to better manage volatility, along with achieving a fair share of the FTs budget allocations and securing parity of treatment for Scottish bodies (such as the Scottish National Investment Bank) in light of HMT’s new FTs Control Framework. The UK Government has committed to exploring these issues and working with Devolved Governments to reaching a resolution ahead of the Autumn budget.

4.4.3 Scrutiny, transparency and governance

Fiscal openness and transparency are important enablers of fiscal sustainability, helping to promote improved policies and strengthen accountability for fiscal management. The Scottish Government is committed to transparency, both in how it manages the public finances, in its wider work with civil society in Scotland’s Open Government Partnership National Action Plans, and in its relationship with external stakeholders, including the SFC and Scottish Parliament.

The SFC plays an important role in enhancing fiscal scrutiny and transparency in Scotland. It provides the Scottish Government with the official independent economy, tax and social security forecasts that underpin the MTFS and the Scottish Budget and provides a commentary on the Scottish Government’s funding position.

It also takes a longer-term view and published its second Fiscal Sustainability Report this year with a particular focus on health. The SFC’s work on fiscal sustainability makes a valuable contribution to our understanding of the drivers and pressures on Scotland’s public finances into the future.

The Scottish Government places great importance in the role of the SFC as Scotland’s independent fiscal institution and welcomes the way in which it has built a strong reputation with the Scottish Parliament and wider stakeholders.

We welcome the findings of the recent OECD review of the SFC, which found that it had broadened the scope of its analysis and strengthened its relationships since the last review in 2019. It recognised that the SFC has a critical role to play in the understanding of fiscal challenges and informing the debate around budget choices, and proposed a number of recommendations for how it should develop in the future. We look forward to working with the SFC as it takes forward these recommendations.

The current protocol between the Scottish Government and the SFC sets out a process by which policies can be assessed as having potentially “economy moving effects” – whereby the policy itself has a further direct or indirect impact on the economy over time. This is an area that is becoming increasingly high profile. For example, the Office for Budget Responsibility have recently costed economy moving impacts of various UK Government policies including childcare, National Insurance Contributions changes and planning reform.

The SFC set out further details and rationale for their own process in their publication, ‘Scotland’s Economic and Fiscal Forecasts’ (2023)^[67]. As part of the regular review of the protocol, we are reviewing the formal framework around how these types of policies are captured within the SFC’s Economic and Fiscal forecasts.

We recognise that delivering our MTFS and the accompanying actions in the FSDP will require appropriate governance and robust monitoring and evaluation arrangements. We will include progress updates in future MTFS publications.