This week Scotland’s Finance Secretary, Shona Robison, unveiled her budget setting out the Scottish Government's tax and spending plans for 2026/27. This was no easy task, as it had to be carefully managed to shore up support ahead of the Scottish elections in May while grappling with an increasingly challenging fiscal outlook. Pitched as a cost of living budget, the Scottish Government is proposing increasing the Scottish Child Payment for children under one, increasing the bottom income tax thresholds, introducing a new ‘mansion tax’ on high-value homes, and bringing in a new Private Jet Tax. While some of these are welcome, many will not come into effect in the forthcoming year, and as always the devil is in the details.

The Scottish Government’s Medium Term Financial Strategy, published in June 2025, outlined the challenge facing the public finances over the coming years. The strategy highlighted a £963 million resource funding gap, which covers day-to-day spending, and a £1 billion capital funding gap, which covers public investment, for yesterday's Scottish Budget. In practice, this gap was reduced by the UK Budget in November which led to £330 million in Barnett consequentials, and a positive reconciliation of £361.5 million from 2024-25 which would be applied to the 2026-27 budget. The UK Government's decision to remove the Two Child Limit also relieved the Scottish Government of their planned spending to mitigate against this, freeing up £126 million.

Despite the fiscal black hole reducing ahead of this budget, the Scottish Government was still facing a challenging fiscal outlook. Going forward, it plans to use a variety of tools to smooth spending out over the Spending Review Period (the coming three and four years for resource and capital respectively). Firstly, despite the budget containing a plethora of new spending plans, the Finance Secretary has actually cut day-to-day spending in 2026/27 by £480 million relative to plans set out in June. The Scottish Government is also planning to use one-off pots, including ScotWind revenues which were originally earmarked to support the transition to greener energy, to bolster both capital and resource budgets over the spending review period. Finally, the revised spending plans are also relying on £1.5 billion worth of public sector ‘efficiencies’, including cutting 11,000 public sector jobs.

On Sunday, our Co-Director Laurie Macfarlane warned that if Scotland wants to maintain its social safety net over the coming years, there will no be choice but to raise additional tax revenue. But rather than much needed fundamental changes on tax, the budget included some unexpected reforms that, while headline-grabbing, are ultimately relatively minor.  

On income tax, the Scottish Government has uprated the basic and intermediate thresholds by 7.4%, amounting to a small tax cut, while higher bands remain frozen for the next three years, amounting to a significant tax rise. The former allows the Scottish Government to claim most taxpayers pay less income tax in Scotland than they would across the rest of the UK, a claim which had been under threat in recent years.

However, the relief on low income households will be small, up to £32 a year, and it is higher earners that will benefit the most from the decision. The graph below separates out the distributional impact of raising lower bands by 7.4% and freezing upper bands relative to a baseline where all bands are uprated with inflation. While the changes to income tax overall are progressive, increasing tax most on high earners, the 7.4% uprate itself has a regressive structure. This is because it is not just low earners that benefit from increasing the bottom two income tax thresholds – all taxpayers do.

The proposed reforms to Council Tax, creating two new bands for houses valued over £1m from 2028, also tinker around the edges without addressing the long-standing issues with the local tax system. Making the revaluation targeted to more expensive homes means most bills will remain based on 1991 property values for the foreseeable future, and misses an opportunity to combine the introduction of the more progressive bands with a wider revaluation that would make the system fairer. 

On the spending side, the government has made various small announcements across portfolios, going with a smorgasbord of policies instead of focusing resources in a few major areas. Despite being relatively small in fiscal terms, one of the more headline grabbing policy announcements was the introduction of a young-child premium to the Scottish Child Payment (SCP) for claimants with children aged under one from 2027/28. By limiting the uplift to the first year after birth, the policy will direct further resources to families with young children that are at higher risk of poverty.

Like the SCP itself, the uplift will increase the disposable income of families in the bottom half of the income distribution. But given the relatively small number of children impacted (estimated to be around 12,000) and small marginal uplift we expect the impact on child poverty to be small. 

​​

Although the Scottish Government managed to avoid difficult decisions in this budget, whoever wins the election in May won’t have the same luxury. Scotland’s public finances are approaching breaking point, with rising demand for health, care and welfare services placing severe pressure on devolved budgets. 

Some of these increased demands will affect the whole of the UK over the coming years, and may result in increased funding via the block grant from the UK Government. However, Scotland faces unique challenges in that as well as offering more generous health and social security than the rest of the UK, including free prescriptions and the Scottish Child Payment, Scotland is also home to higher health inequalities and a more rapidly ageing population, which means that spending in these areas is likely to outpace any increases in funding from the UK Government. 

The Medium Term Financial Strategy published in June 2025 forecasted that spending would outpace available funding for both resource and capital in every year to 2029-30. The Scottish Fiscal Commission has reported that if the Government is able to deliver its £1.5 billion of savings, the spending plans laid out yesterday could be delivered within the allocations given at the Spending Review. However, this is a big ‘if’, and crucially this is merely to maintain existing services. Delivering improvements to the NHS, tackling poverty and delivering net zero would require substantially more revenue.

For capital spending, which includes any spending on longer-term investments like affordable housing or public infrastructure, the situation is even more stark. The Medium Term Financial Strategy identified a funding gap of £2.1 billion by 2029-30, which represented 23% of the capital budget at the time. The Scottish Government has called on the UK Government to agree to an earlier review of the Fiscal Framework with a view to expanding its borrowing capacity. But in the short term, the long-awaited Infrastructure Delivery Pipeline published alongside the budget yesterday has reprioritised capital spending, cutting spending by 10% (£860 million) for next year compared to plans laid out this past June. In theory it is easy to deal with a shortfall in capital funding by delaying or cancelling investments, which is harder to do with ongoing day-to-day spending on services. Yet with Scotland’s ageing public sector asset base and increased demand for spending on the transition to net zero, delaying investment in key areas is likely to have knock-on impacts on resource spending in the future. 

 

The obvious question, then, is where this additional revenue will come from. Scotland clearly cannot rely on short-term fixes forever in the context of these long-term societal challenges. For resource spending, given the UK Government’s stringent fiscal rules, it is highly unlikely it will turn on the funding taps anytime soon. Indeed if the UK Government takes steps to curtail spending areas like education and health, this could reduce the funding for Scotland further. This means that, sooner or later, Scotland’s politicians will need to have an honest conversation with the public. If the state is to sustain the services we all rely on, taxes will have to rise. If they don’t, then spending cuts and a return to austerity are an inevitability. Indeed, yesterday’s budget already includes cuts this coming year and ‘efficiency savings’ over the Spending Review Period.

 

But if tax revenue is to rise, the key question is: which taxes, and on whom? Over recent decades Scotland has been on a journey of fiscal devolution, yet in some areas devolved tax powers remain under-utilised. This creates an opportunity as, although there is no silver bullet solution, there is some low hanging fruit. That Council Tax remains in place 27 years after the creation of the Scottish Parliament is a damning reflection on our politics. However, despite repeated pledges to abolish it, the tax has survived largely unchanged. Replacing it with a fairer, modern property tax could raise revenue, reduce inequality, and improve the functioning of the housing market.

 

But we shouldn’t stop at local taxation. Nearly all devolved taxes are ripe for reform in one way or another. Land and Buildings Transaction Tax (LBTT), which replaced UK Stamp Duty Land Tax in Scotland in April 2015, is clumsy and inefficient. Although it follows a more progressive structure than Council Tax, transaction taxes like LBTT constrain labour mobility and growth by discouraging potential house movers from economically beneficial choices like moving to a new city for work. While Business Rates are based on more recent revaluations, arbitrary reliefs cost the exchequer hundreds of millions of pounds each year – and a suite of new reliefs were announced in yesterday’s budget. We welcome the Scottish Government’s decision to finally use the powers it has held over the taxation of air travel since 2016, and will be feeding into the consultation into the design of the new Air Departure Tax. Our research shows that the richest households consume 11 times more carbon from aviation than the poorest households. We also welcome the new Private Jet Tax as a clear signal that those who pollute the most should pay more, and as a practical step towards tackling the climate crisis. 

 

While reforming these smaller taxes would help raise some additional revenue, alone they will not solve Scotland’s fiscal headache. While some have called for a new wealth tax, only the UK Government could implement and administer one. That brings us to the elephant in the room: income tax. The Scottish Government’s use of income tax powers to date has focused on increasing taxes for high earners and marginally reducing taxes for low earners. While this approach, designed to protect low and middle earners, may have been justified in the past, it is no longer a viable strategy. This is because there are simply not enough high earners in Scotland to raise the level of revenue required — or anything close to it.

 

If Scotland wants to maintain its proud social contract we must confront an uncomfortable truth: most of us will need to pay a little more income tax. Given existing inequalities, this must be done in a fair and progressive manner. Although it will be unpopular, the truth is it is unavoidable. Those who oppose broader-based tax rises should be clear about which public services they would instead choose to cut.

These decisions are clearly challenging – all tax changes have winners and losers – but maintaining the status quo is simply not an option. We will soon be publishing new research modelling the fiscal options available to the Scottish Government, and setting out recommended reforms to raise revenue, strengthen public services, and support a just transition to net zero. The message is clear: Scotland can maintain its distinct social contract, but only if we are willing to pay for it.  

This year’s budget may have just about scraped by without tough tax decisions, but future budgets will not be so forgiving. That leaves difficult choices for whoever takes office after May’s election. The options are clear: raise more revenue, or face a return to austerity. The sooner politicians are honest about this, the better. 

*Distributional analysis in this blog was done in ScotBen with input from Graham Stark.