The next Scottish government will face stark financial decisions shortly after taking office, with leading economists warning that difficult choices on public spending, including the growing public sector pay bill, can no longer be avoided.
Experts at the Fraser of Allander Institute, based at the University of Strathclyde, have cautioned that election manifestos from Scotland’s main political parties fail to reflect the true scale of the fiscal challenge ahead.
Professor Mairi Spowage, director of the institute, said the incoming administration would face an immediate financial reckoning following the 7 May election. She highlighted that the previous Scottish National Party government consistently spent beyond its core revenues, relying heavily on temporary funding sources such as offshore wind licensing income and one-off Treasury payments.
As a result, Scotland could be heading towards its most difficult budget since the establishment of the Scottish Parliament in 1999, with potential spending cuts required to bridge the gap.
Spowage warned that political parties had collectively avoided confronting reality, noting that savings identified in their plans were often immediately reallocated elsewhere. She stressed that continuing current spending patterns is unsustainable, particularly given the pressure to increase expenditure.
Recent analysis by the institute shows that Scottish public spending has risen by an average of 3.9 percent annually in real terms since 2019. However, revenue growth from taxes, UK government grants and additional funding streams has lagged slightly behind at 3.6 percent.
Spending in Scotland has also outpaced the wider UK, where growth has averaged around 3 percent annually over the same period. Economists partly attribute this to higher-than-planned public sector pay settlements.
The Scottish government previously estimated a £5bn gap between projected spending and income by the end of the decade. While ministers introduced a revised financial strategy earlier this year to address some of the shortfall, concerns remain over long-term sustainability.
Forecasts from the Scottish Fiscal Commission suggest that funding for day-to-day public services will increase by only 1 percent per year over the next five years, intensifying budgetary pressures.
The concerns mirror those raised by the Institute for Fiscal Studies, which recently concluded that none of the major parties’ financial plans are fiscally credible.
David Phillips, a senior economist at the institute, said there is a clear lack of realism across the political spectrum about the severity of the financial constraints facing the next administration.
João Sousa, deputy director at the Fraser of Allander Institute, warned that unresolved financial risks remain embedded in Scotland’s budget. These include rising costs for public sector wages, increasing demand for health and social care, and a growing social security bill, which is expected to exceed Scotland’s share of UK welfare spending by £1.2bn by 2031.
Currently, nearly half of Scotland’s £59bn annual budget is allocated to public sector pay, covering essential roles such as healthcare workers, teachers and local authority staff.
Although a policy introduced two years ago aimed to cap pay rises at 9 percent over three years, most of that limit has already been used within the first two years due to negotiated settlements with unions.
Economists warn that maintaining pay levels in line with inflation will likely require exceeding that cap, creating long-term financial commitments that future governments will be forced to sustain unless workforce reductions are implemented.
Scottish ministers have proposed saving £1.5bn through efficiency measures and a gradual reduction in the public sector workforce. However, economists remain sceptical, suggesting such measures may only delay more difficult decisions.
Meanwhile, major parties including the SNP, Labour and the Conservatives have pledged not to increase income tax, with some even expressing ambitions to reduce it when finances allow, further limiting fiscal flexibility.
Leading economists, including Professor Graeme Roy, Professor Anton Muscatelli and Professor Stuart McIntyre, have warned that the next Scottish Parliament will face an overarching economic and fiscal challenge.
They point to slow growth in living standards, an ageing population and rising demand for public services as key pressures. They also caution that global instability, including tensions in the Middle East, could worsen the UK’s broader financial outlook and place additional strain on Scotland’s finances.