Scotland's Public Service Reform Strategy: Delivering for Scotland

Annex A – Projections of Avoided Public Spending

Introduction

The Avoided Public Spending model, developed as part of the Public Service Reform Strategy, aims to develop projections of the system-wide public spending costs associated with key ‘preventable’ drivers of demand into the future. This is then used to consider illustrative scenarios for reducing public spending costs in future through tackling key drivers of demand.

The modelling is based on a number of assumptions, as set out in this annex, and is used for illustrative purposes only. Analysing the system-wide costs associated with drivers of public spending demand, such as poverty or obesity, is complex. Tackling key underlying drivers of public spending demand will depend on a number of factors and will require cross-cutting policy efforts.

Results

The results of the modelling are shown in figure 1. The indicative modelling suggests:

• The whole-system cost of poverty, including the increased public spending on health, education, criminal justice and housing that results from poverty, is projected to reach £11.1bn by 2035/36. Reducing overall poverty by a quarter (which, based on latest statistics, is equivalent to reaching the Scottish Government’s target for child poverty by 2030) could avoid £2.9bn of public spend and halve the projected fiscal gap by 2035/36.
• The public spending cost of smoking, including wider costs to the health service, social care and responding to fire-related incidents, is projected to reach £2.5bn by 2035/36. Achieving the Tobacco and Vaping Framework target to reduce population smoking prevalence to 5% by 2034 could avoid £1.6bn of public spend and reduce the projected fiscal gap at 2035/36 by 26%.
• Obesity is projected to cost the health service £1.3bn by 2035/36. Reducing Scotland’s obesity rate from 32% to between 28% and 22% by 2035/36, which would bring Scotland’s obesity rate in line with rates seen in Canada and Finland respectively, could avoid between £130m and £380m of spending within the NHS, and reduce the fiscal gap at 2035/36 by 2-6%. The wider cost avoidance beyond the NHS would reduce this even further.

Modelling approach

The process for developing projections of avoided cost are set out in figure 2. The model estimates the system-wide public spending costs from selected preventable drivers of demand; projects these to 2035/36 based on wider projections for public spending; and uses scenarios to illustrate the potential avoided public spending that could result from increasing prevention efforts over time.

Figure 2 – Avoided Public Spending Model Approach

Step 1 – Estimate system-wide public spending costs from ‘preventable’ drivers of demand

• Identify literature estimates of the system-wide public spending costs resulting from “preventable” drivers of demand. Scale these estimates to 2025/26.

Step 2 – Project preventable drivers of public spending costs out to 2035/36

• Project these estimates over 10 years to 2035/36, in line with projected growth in overall public spending.

Step 3 – Develop scenarios for avoided public spending in 2035/36

• Apply an avoided public spending assumption in 2035/36 to illustrate the potential impact from taking preventative action to tackle key drivers of spending.

The model assumes that avoided costs are achieved through maximising the impact of current preventative activity or enhancing preventative activity through systems change, as opposed to increasing public spending beyond that currently expected. This reflects the focus of the Public Service Reform Strategy on effective systems change for achieving greater impacts from preventative activity.

Drivers of public spending modelled

A literature review exercise was conducted to identify estimates of systems-wide public spending costs related to drivers of “preventable” demand. This found significant variability in the quality of evidence underpinning estimates of different preventable demand drivers.

As a result, two main criteria were set for inclusion of public spending cost estimates in the model - the estimate should be 1) based on a reasonably robust methodology and 2) should include a range of potential public service costs.

Based on these criteria, we selected three estimates as follows:

• Poverty – The estimate used in the model is based on a 2016 Joseph Rowntree Foundation (JRF) report for the UK, which includes the wider public spending costs on health, education, care, the justice system and housing, which are attributable to poverty. This estimate was apportioned to Scotland based on Scotland’s share of the UK number of people in poverty.¹⁵ Other estimates were available, however the coverage of these estimates were limited compared to the JRF estimate. These estimates were used to sense check the apportioned JRF estimate.
• Smoking – the model uses a 2024 estimate of the public spending related costs of smoking from Landman Economics/ Action on Smoking and Health.¹⁶ The report includes results for the UK and England and includes the costs of smoking associated with the health service, social care and fire-related incidents. The Scotland estimate was generated by subtracting the England public service costs figure from the UK estimate, and apportioning based on Scotland’s population share of the rest of the UK estimate. This report estimates the costs to the NHS, social care and fire services from smoking.
• Obesity – The estimate used in the obesity projection is taken from analysis of the health public spending costs of obesity by Frontier/NESTA.¹⁷ This covers the health costs arising from treating health diseases that are attributable to obesity. The wider cost avoidance beyond the NHS would reduce this even further.

Figure 3 provides an overview of the estimates for each of the above drivers of preventable demand. Given estimates are from different years, these were scaled to the year 2025/26 using growth rates in public spending from the Government Expenditure and Revenue Scotland 2023-24 publication (for the years up to 2023)¹⁸ and Scottish Budget 24/25 and 25/26 (for the years 2024/25 and 2025/26).¹⁹²⁰

It should be noted that estimating the public spending cost associated with cross-cutting drivers of demand is complex and it is likely that most studies don’t cover the full range of costs. As a result, estimates of public spending demand should be treated as illustrative and “ranking” different drivers may not be appropriate. Some of the estimates used are also apportioned to the Scotland and would benefit from further analysis to produce more robust Scotland specific estimates.

Projections of key public spending demand drivers

To develop longer term projections on Scotland’s spending and funding, the avoided public spending model uses the Medium Term Financial Strategy (MTFS) 2025 as the source of baseline data on overall Scottish Government spending and funding. This projects Scotland’s public spending and funding over five years from 2025/26 to 2030/31.

Recognising that tackling cross-cutting drivers of public spending demand is a long-term activity, the model extends the MTFS projection for spending and funding out to 2035/36 based on the average growth rate over the 5-year MTFS projections.

We grow all preventable demand drivers noted in figure 1 in line with the projection for overall public spending to reflect growth in costs such as inflation and wages over time. In reporting results, we also illustrate the impact of reducing public spending costs on the gap between Scotland’s spending and funding.

Scenarios for future avoided cost

To illustrate the potential impact of tackling key drivers of future public spending demand, we then apply an assumption for the reduced public spending cost to be achieved after 10 years (2035/36) from enhanced prevention activity. The scenarios used for each of the projections are provided in Figure 4.

Figure 4 – Scenarios for avoided public spending costs from preventable drivers

Preventable driver of demand: Poverty

• Avoided public spending scenario: Reducing overall poverty by 26%, which is equivalent to reaching the Scottish Government’s target for child poverty by 2030

Preventable driver of demand: Smoking

• Smoking prevalence is reduced from 14% at present to 5% in 2034, in line with the Tobacco and Vaping Framework target. This represents a 64% reduction in smoking.

Preventable driver of demand: Obesity

• Obesity is reduced by between 10% and 30% by 2035/36, which would bring Scotland’s obesity rate (32%) roughly in line with obesity rates in Canada (28%) and Finland (22%) respectively.²¹

In these scenarios, it is assumed that the avoided public spending costs are achieved through maximising current preventative activity, or enhancing this activity through systems change. It does not factor in any increasing public spending beyond that currently expected. If some additional spending is required to achieve future savings, then this would need to be factored in.

Limitations and caveats

Note there are a number of caveats to this approach for projecting preventable public spending costs and this analysis should be treated as illustrative only.

• The systems-wide costs associated with drivers of public spending demand, such as poverty or obesity, is complex to estimate. Therefore, studies of this kind often underestimate the true costs across all domains of public services.
• The model only considers the cost of drivers such as obesity and poverty on public spending. These drivers will likely have wider impacts on economy, society and public revenues, meaning the wider societal cost is much higher than considered in this model focussing entirely on public spending impacts.
• The model assumes that there is a direct correlation between a reduction in prevalence rates (e.g. the obesity rate) and public spending. For example, a 10% reduction in obesity is assumed to lead to a 10% reduction in spending after 10 years. However, evidence on the strength of this relationship varies.
• Reductions in public spending costs set out in this analysis assume no additional public spending to achieve them. The underlying assumption is that cost reductions are achieved through maximising the impact of existing public spending in preventing future costs, or in enhancing this activity. If additional investment is required, then the projected (net) cost avoided will be less.