Scottish Budget 2026 to 2027: integrated public sector pay and workforce policy

Integrated Public Sector Pay and Workforce Policy 2026-27

Background

The Public Service Reform (PSR) Strategy published in June 2025 outlined a clear direction for modernising how we work, with workforce transformation at its core. Scotland’s public sector workforce is our most valuable and important asset in delivering high-quality public services. Pillar 3 of the PSR Strategy focuses on making Scotland’s public services efficient, effective, and fiscally sustainable by embedding a culture of continuous improvement and collaboration across the system. It supports a shift in operating models, with a focus on efficiency, partnership, and enabling as much public sector resource as possible to be directed to front-line services.

The PSR Strategy recognises that key enablers are required to ensure we have the right number of people in the right roles. This includes a workforce management policy, best practice workforce planning and re-deployment guidance.

As set out in the Fiscal Sustainability Delivery Plan (FSDP) published in June, the public sector workforce accounts for over half of Scotland’s resource budget. Our reform agenda recognises the need to take steps to reprofile the size and shape of our public sector workforce. The FSDP set out the next step for a managed, downward workforce trajectory of 0.5% on average per annum to 2029-30, while ensuring that public services are sustainable over the medium-term. This trajectory is designed to align with service redesign, automation, and smarter use of resources - not blunt reductions.

The FSDP underlines the connection between Pay Policy and Workforce Management as dual drivers of fiscal sustainability and this Integrated Pay and Workforce Policy is being published for the first time alongside the 2026-27 Scottish Budget. This policy is the first step in operationalising the commitments in the FSDP to manage the public sector paybill and workforce size through a co-ordinated approach to pay and workforce planning.

Economic and Fiscal Context

Scotland’s fiscal position remains highly constrained despite some uplifts in funding. The 2026–27 Scottish Budget will include additional Barnett consequentials and savings from policy changes; however, medium-term projections indicate a structural challenge between funding and spending. The Medium-Term Financial Strategy (MTFS) showed a shortfall of nearly £2 billion in resource and capital funding for 2026–27, rising to £4.7 billion by 2029–30.

The Fiscal Sustainability Delivery Plan sets out how this gap will be managed through efficiency measures and workforce reform. The managed reduction of the public sector workforce is designed to protect frontline services while delivering savings of up to £0.7 billion over five years. Alongside this, there is a growing need to address inefficiencies such as outsourcing, which removes significant value from public sector budgets and local economies. Despite fiscal pressures, Scotland’s economy continues to demonstrate resilience and relative strength. GDP per person has grown faster than the UK average since 2007, and Scotland remains the leading UK destination for Foreign Direct Investment outside London. Growth is expected to remain steady at around 1% in 2025, supported by services and construction, though productivity challenges and subdued consumer confidence persist. Despite a weakening labour market, unemployment remains low at 3.8%, and real earnings growth remains positive but slowing.

Although inflation remains above target it has begun to fall, reaching 3.2% in November. Inflation is forecast to fall to 2.5% across 2026, and this should allow further reductions in interest rates, which have come down to 3.75% in December 2025 from 4.75% at the beginning of 2025.

This context underlines the importance of fiscal discipline and reform to ensure sustainable public services. Meeting Scotland’s ambitions of eradicating child poverty, maintaining high-quality public services, tackling the climate emergency, and growing the economy will require careful prioritisation and a continued focus on efficiency, innovation and partnership working.