The Programme for Government was launched at the start of September, offering the first real glimpse into what the Scottish Government has in store for the new parliament. For the first time, it sets out the Scottish Government’s priorities for the next five years, not just the year ahead. 

Some aspects of the Programme for Government are commendable, including a focus on prevention, expansion of community-owned renewables, and a commitment to deliver the long-overdue Heat in Buildings Bill. However, Scotland’s projected fiscal gap was the elephant in the room. Although it was barely mentioned, it is evidently a key driver behind sweeping overhauls of public bodies and reductions in the devolved public sector workforce.

The Programme for Government set out the ambition to embark on a programme of “rationalisation of [public] bodies to ensure they deliver excellent services for people in the most efficient way possible.” In addition, the government aims to replace 14 regional health boards with two “Strategic Health Boards.” In practice, it is the latest in a growing line of publications indicating that ministers are preparing to roll back the state in an attempt to close the looming public finances gap.

As Scotland’s economy grapples with a series of interwoven crises, it sits at the precipice of a markedly challenging fiscal landscape, necessitating an urgent array of difficult decisions for the Scottish Government. Indeed, fiscal constraints of this magnitude have not been seen since the Scottish Parliament was created. The stubborn gap between planned expenditure and funding has called into question the Scottish Government’s ability to deliver on its core objectives: eradicating child poverty, growing the economy, tackling the climate emergency, and delivering high-quality and sustainable public services. 

Decisions about how to close budget gaps, and who will bear the costs, are political choices, not fiscal inevitabilities. How the Scottish Government responds to its fiscal crunch will shape Scotland’s economy for years to come. In putting the public finances on a more sustainable path, we must learn the right lessons from history - and not repeat the mistakes of the past.

Published in June 2025, the Medium Term Fiscal Strategy (MTFS), which provides the economic and fiscal context for the Scottish Budget and sets the medium-term strategy for sustainable public finances, highlighted factors compounding fiscal instability, such as demographic changes. Its assessment noted that resource spending, which covers day-to-day running costs, is set to exceed available funding by £2.6bn by 2029-30. Capital spending, which covers long-term public investments, is forecast to exceed Scotland’s available funding by £2.1 billion over the same time period. Importantly, these budget gaps are merely to stand still and maintain existing services, which in many cases are inadequate. Spending to deliver on the Scottish Government’s various policy priorities will need to come on top of this.

What has the Scottish Government done in response? Published in June 2025, the Strategy for Public Service Reform (PSR Strategy) highlighted additional pressures on public services, such as the Covid-19 pandemic, and looked ahead to future challenges like the aforementioned demographic shifts. The strategy outlines the need to identify the “underlying systemic barriers and root causes which prevent us moving faster and further” as well as setting out “practical actions to overcome those barriers.” It stipulates the aim is not to reduce service provision; instead, it intends to deliver existing public services more effectively and efficiently. It aims to do so by centring three pillars: prevention, joined-up services, and efficient services. 

The following week, the government published its Fiscal Sustainability Delivery Plan (FSDP). Although it stipulates frontline services will be protected, it sets out a “managed downward trajectory” for the devolved public sector workforce. It aims to reduce the workforce by 0.5 per cent per annum on average over the next five years through measures such as “service re-design, automation, process improvement, re-prioritisation, mergers, and shrinking corporate functions.” 

Unlike the FSDP, the PRS Strategy does not mention the 0.5 per cent reduction target. The narrative set out in the PRS Strategy is largely one of opportunity, grounding public sector services in prevention and efficiency. In contrast, the FSDP narrative centres on workforce reductions necessary to reduce the fiscal gap. 

This raises questions about how compatible the FSDP and PRS Strategy are, and how they will function together going forward. At present, details are light. For example, while some aims in the PRS Strategy are commendable, such as prevention to reduce service demand, it is not clear how this approach aligns with a workforce reduction target. Additionally, preventative measures often carry significant upfront investment, which cannot be achieved with funding constraints.

In November 2025, the UK Government budget unlocked around £330m in additional resource and capital funding for 2026-27 through Barnett consequentials. It also offset the Scottish Government’s expected cost of mitigating the two-child cap, which was predicted to be £151m for 2026-27. While this provided some much-needed breathing space, it did little to address Scotland’s long-term fiscal pressures. 

In January 2026, then-Finance Secretary Shona Robison outlined the Scottish Budget. As noted in more detail here, while it contained an array of new spending plans, day-to-day spending in 2026-27 was cut by £480 million compared to plans set out in June 2025. Crucially, revised spending plans are contingent on £1.5bn of public sector “efficiencies”, including 11,000 fewer public sector jobs. 

The future remains far from certain, not least because the Scottish Budget is highly sensitive to UK Government decisions on tax and spending. And, unlike Westminster, Scotland does not have the luxury of unlimited borrowing powers. 

Following the Scottish Parliament election in May 2026, the new cabinet saw the creation of a cabinet secretary position specifically for public service reform. This role includes responsibilities covering “public sector reform policy including civil service operations and efficiency” and “public sector and public bodies productivity and efficiency.”

In August, the government published ‘Serving Scotland: our five-year plan’, setting out a route map for the next five years to develop a trusted, high-performing civil service. It lays out an array of measures, from a review of its hybrid working policy to measures to enhance performance culture and more efficient ways of working with ministers. It is also explicit in its aim to reduce the workforce to become “a smaller, more focused organisation” through measures such as consolidating areas of work and not replacing roles. 

Sensible efficiencies can and should be made. Duplicated workstreams, for example, are ineffective and the government should reorganise its approach to strategy creation and implementation to tie plans to common aims. While the public sector can undoubtedly become more efficient, trying to close the budget gap through cuts alone risks repeating austerity’s mistakes. While details are not yet known, merging public sector bodies will bring high upfront costs, which could undermine efforts to close the budget gap. Health board centralisation could also overlook distinct geographical needs, disproportionately harming rural and island communities.

As for public sector workforce reduction,  the FSDP notes this will include “public bodies planning the balance of recruitment with natural attrition to enable an overall reduction in staffing levels.” This alone is unlikely to deliver target workforce reductions in the timeframe, nor will it close the fiscal gap. Further, details of how it is achieved, who it will impact, and where it will be targeted remain unclear. 

This generates questions, particularly for areas that will see increased future spending and investment needs. For instance, health and social care spending, which is higher for older people, is projected to rise from around 40% of devolved public spending in 2029/30 to almost 55% in 2074/75 due to demographic shifts. The PRS Strategy notes that without reform, revenue will be unable to meet this demand, culminating in a potential budget gap of 11.1%. Even with reasonable efficiency and prevention measures, health and social care will require a step-change in public funding that run counter to an approach aimed at spending cuts. 

Further potential challenges exist. While workforce reduction could cut costs over the long term, it is highly unlikely to close the fiscal gap alone without additional measures. Moreover, processes like service redesign and mergers – both noted in the PRS Strategy – are lengthy, expensive, and can consume workfroce capacity, eating into day-to-day operations. 

This raises the potential consequences of kicking the can down the road regarding delivering a sustainable balanced budget. While much of the approach to date is unclear, the knock-on effects of short-term decision-making emanating from a target-driven approach could increase spending pressures further down the line. 

If designed with service improvement at its heart, public service reform has the potential to be very positive. There is a danger however that this is simply a cost cutting measure frame as a positive reform. This raises questions around who has been consulted. What role have trade unions representing potentially impacted workers been able to play in this process? How can those most reliant on public services have a seat at the table? And will these groups be enabled to meaningfully shape decision-making in the interests of workers, public services and impacted communities going forward? 

In August, the UK’s National Audit Office published six considerations for public sector re-organisation, including public body mergers. It noted, “The greatest risks arise when changes are implemented quickly without clear objectives, robust governance, or a clear understanding of the resources required to realise benefits.” 

First, government should be clear about why changes are being made, as there is often “no direct relationship between making structural changes and service delivery capability improvements.” Second, costs should be tracked from the outset to determine value for money with baseline measures, benefit metrics and cost reporting. Third, estimates of time, costs and disruption to day-to-day operations must be realistic. Fourth, it requires attention to culture, staff engagement and capability retention, not just systems and governance. Fifth, operational delivery during a transition is challenging and consumes costly management capacity. Finally, it requires the early establishment of clear ownership, decision-making structures and programme controls. Thus far, announcements from the Scottish Government have not thoroughly addressed any of the above considerations. 

From the soaring cost of living and unacceptable levels of poverty, to escalating climate and environmental breakdown, there is no shortage of crises requiring action. As Scotland navigates the next steps while trying to reduce fiscal pressures, the government should pause, reflect on the past decade and a half, and ensure lessons have been learned. 

The 2008 financial crisis exposed fundamental weaknesses in Scotland’s economic model, and the UK Government's decision to pursue austerity exacerbated them. While unnecessary, the stated rationale for austerity was presented as a means of achieving fiscal sustainability after the economic turmoil. In essence, however, it attempted to balance the books on the backs of the poor, which in turn generated long-term social and economic harms. 

Over a decade of austerity corroded vital public services and infrastructure, worsened income and wealth imbalances, stifled demand, undercut productive capacity, led to the slowest economic recovery in over a century, and squeezed living standards. 

The public sector workforce reduction overseen during the Coalition years profoundly impacted the labour market. As a 2014 report by the Centre for Local Economic Strategies notes, between Quarter 2 2010 and Quarter 2 2014, nearly 550,000 public sector jobs were lost in England. The gender breakdown of these job losses was significant. Within local government, there was a disproportionate impact on women, with 42% of the posts made redundant being women in part-time employment. 

In Scotland, aspects of the economy have never recovered from the financial crisis and austerity. Before 2008, real weekly earnings (earnings after adjusting for inflation) in Scotland increased by 2.2% each year on average. Although earnings started to recover between 2015 and 2021, they fell by 5% once in 2022 due to inflation. This event represented the largest decline in real weekly earnings in Scotland since the financial crisis. Future Economy Scotland analysis found that average earnings in Scotland are nearly £17,000 lower than they would have been if wages had grown as normal rather than flatlining following the 2008 financial crisis. 

Intrinsically connected to living standards is poverty, which disproportionately impacts structurally oppressed and marginalised groups like single-parent families and Black, Asian and minority ethnic groups. Eradicating child poverty remains one of the Scottish Government’s key aims, and it has taken important steps towards achieving this. The Scottish Child Payment, for example, was predicted to keep 40,000 children out of relative poverty in 2025-26. Despite this, almost one in four children are living in poverty, and over half of these children live in a household where someone is disabled. 

Alongside low pay - as was underscored by the recent 20% increase in zero-hour contracts in Scotland – a key driver of poverty has been the austerity programme. A 2022 study found reversing key UK Government welfare reforms since 2015 would have brought around 70,000 people out of poverty in Scotland in 2023-24.

Inherently tied to inequalities, the causes and distributional consequences of climate and environmental breakdown are unevenly felt both between and within global regions and countries. Future Economy Scotland analysis shows that the richest 5% of households in Scotland have a carbon footprint four times that of the poorest 5%.

Looking ahead, many spending pressures on governments are set to rise. Alongside aforementioned dynamics like demographic shifts, public spending decisions need to plan for mitigation, adaptation, and damage costs associated with the escalating threat of climate and environmental breakdown.   

There are obvious costs, such as strategic fiscal support for Scotland’s labour market transition, with a particular focus on the North-East. Our research found that total employment in Scotland supported by oil and gas fell by 32% since 2014, despite hundreds of new oil and gas licenses being awarded during this period. With strong ambition and targeted policy, the transition can create up to 40,000 more energy jobs than will be lost. However, this will require a much more proactive industrial strategy and labour market planning. 

Highlighting the need for fiscal space to cover damage costs, this summer witnessed prolonged droughts and successive heatwaves. In July, a wildfire in the Cairngorms burned its way through 25 sq km of moorland and forestry, requiring over 500 firefighters and necessitating evacuations. As Scotland’s chief fire officer states, “If we are serious about protecting lives, livelihoods, infrastructure, our natural environment and the resilience of our nation, we must act now – together, with purpose, and with a long-term commitment to prevention, as well as response.”

The recent waves of extreme heat experienced in the UK demonstrate that alongside the damage costs sit increasingly prevalent but less visible social and economic harms. As Verdant reports, manual work becomes harder and more dangerous, workers – particularly those in insecure work – suffer income losses, heat-related sleep deprivation contributes to productivity slumps, and infrastructure starts to fail. 

While climate breakdown implications are far-reaching, the need to bolster capacity and resilience in vital public services is clear. This means preparing the NHS for more patients during heatwaves, accelerating retrofitting to avoid poor long-term health outcomes, strengthening afforestation to tackle flooding, and re-imagining home insurance for households facing coastal erosion, flooding and wildfires. Climate breakdown also drives inflationary pressures. According to the Energy & Climate Intelligence Unit, foods hit by extreme weather are “rising over two times faster than the rest of the food basket.” 

The cost of delayed action will far outweigh the cost of acting today. So, what scale of investment is needed to keep Scotland within this proposed fair and safe emissions budget? Scotland’s Carbon Budget report sets out whole-economy costs and cost savings for a balanced pathway. It notes that many areas of upfront investment will translate into savings later on. On average, there will be a net cost of around £750 million per year between 2025 and 2050, which is around 0.4% of Scotland’s GDP, and the pathway becomes a net saving from 2043, but squeezed capital budgets are preventing Scotland from making these win-win investments.

Importantly though, the Scottish Government hasn’t just committed to reach net zero – it has committed to achieve a just transition to net zero by 2045. Far from the simpler challenge of emissions reduction, delivering a just transition means tackling systemic problems embedded in the current economic model, and hardwiring climate justice into every aspect of Scotland’s economy. This will require a fundamentally different approach to economic policy. 

While inevitably challenging, it is also Scotland’s greatest economic opportunity. Delivered effectively, it can create a new generation of well-paid green jobs, raise living standards, reduce poverty, and tackle deep-rooted inequalities. However, the window of opportunity to achieve this is narrow, and it will require a long-term, joined-up, strategic approach to revenue raising as well as spending and investment decisions. 

Real-terms capital budget reductions and planned reductions to the public sector workforce are coinciding with increased need for a step-change in public spending and investment – all while operating in a constrained fiscal framework with limited borrowing powers. 

Addressing this mismatch through fiscal consolidation alone risks repeating past mistakes: undercutting vital public services, squeezing productive capacity, undermining economic progress, exacerbating inequalities, and sending future costs soaring by failing to deliver a just transition. Put simply, if Scotland wants to deliver a just transition and strengthen public services, taxation must raise additional revenue, as is outlined in more detail in Funding Scotland’s Future: Tax Reform for a Just Transition. 

While tax changes must be fair and progressive, relying exclusively on increases at the top of the income distribution won’t suffice. Future-proofing Scotland’s economy by strengthening public services while meeting increased spending and investment needs means confronting an uncomfortable truth: most Scots will need to pay a little more tax. 

Future Economy Scotland has set out an ambitious yet credible package of reforms to raise an estimated £2.3 billion annually. On income tax, we recommend increasing income tax by 1 percentage point on the lowest three bands and by 2 percentage points on the highest three bands, alongside reducing the higher rate threshold to £40,000. Accounting for behavioural responses, we estimate this would raise £1.5 billion per year. While the media recently had a field day over claims that Scotland's 48% top tax rate has lost revenue, our analysis shows those claims are deeply flawed.

A long-held broad political consensus holds that Council Tax is regressive, outdated and inefficient, yet efforts to replace it have been futile. We recommend replacing Council Tax and LBTT with a recurring Progressive Property Tax based on up-to-date property values set at 0.75% on property values up to £400,000 and rising to 1.0% on the portion above that threshold. We also recommend applying surcharges or discounts linked to Energy Performance Certificate (EPC) ratings to incentivise energy efficiency improvements. Combined, this could raise £222 million per year, with most of the additional revenue coming from the top half of the income distribution. 

In addition, the government needs to replace the existing system of Non-Domestic Rates with a Green Land Value Tax set at 2.9% of market land value. This should include widening the tax base to include forestry land, which is currently exempt from NDR. While this should be phased in gradually, we estimate it could raise an additional £482 million a year in the longer term. 

Building on this, we recommend introducing a new betterment levy to capture land value uplift arising from the granting of planning permission. With a 30% capture rate, this could raise £75 million per year from residential development alone and ensure that unearned windfall gains are shared with the public.

Alongside revenue-raising measures, we need to maximise returns on public spending and investment. There are many avenues to achieve this, as is outlined in more detail in the joint report with the UCL Institute for Innovation and Public Purpose, A Green, Fair and Growing Scotland: A Mission-Oriented Approach. One such option is to confront the creeping prevalence of outsourcing. 

Like many governments, the hollowing out of public sector capacity through austerity coincided with a steep rise in the reliance on private consultancy firms, brought in at significant cost to design, steer and implement government approaches and policies. Indeed, in a five year period from 2016, the Scottish Government spent around £25 million on private consultancy firms, with annual spending increasing dramatically over the period. In 2023-24, Ernst & Young LLP received a sum aggregate of £3,925,555.66. 

Reliance on outsourcing thought leadership and direction hollows out public sector capabilities, often extracts value, and obscures democratic decision-making. In doing so, it can contribute to a cycle of dependency: the more public sector capacity is hollowed out, the more reliant the government becomes on outsourcing, which in turn further undermines public sector capabilities and encourages more outsourcing. 

Strengthening public sector capabilities in Scotland is not just about efficient spending decisions. While unjustifiably high, the overall cost of large private consultancies won’t make a sizeable dent in the fiscal gap. Insourcing is an opportunity to align with Scottish Government goals, which are often at odds with consultancies’ priorities. Crucially, it is a chance to create dynamic, efficient, confident and strategic in-house capacity fit for the future – positively contributing to public sector reform. 

Beyond national-level decision-making, Scotland’s needs to rewire its approach to local economic development to make money go further by growing, retaining, recirculating and redistributing local wealth. This is especially crucial at a time when local authorities have been implementing significant real-terms spending reductions. Conventional approaches to economic development are often geared towards a top-down approach, where wealth is extracted from a locality, shored up and flows out of communities. Community wealth building offers an antidote, transferring physical and financial assets into the hands of local economies and communities.  

This should involve developing place-based assets to ensure local wealth is retained and grows, minimising absentee ownership to recirculate local wealth, and prioritising local spending and investment to minimise wealth leakage. One way to advance this is to enhance the role of conditionalities as an innovative tool to drive economic dynamism. 

Building on the need to re-evaluate conditionalities at a national level, there is an opportunity for the state to shift from intervening in market failure to actively stewarding the economy. This should involve mobilising strategic public assets, with a focus on securing recurring revenues. 

Future offshore wind leasing rounds offer an opportunity to ensure benefits stay in Scotland. While ScotWind represented a major milestone in advancing Scotland’s renewables boom, it did not maximise benefits to industry, workers, communities and taxpayers. Our research found that incentives for developers to use Scottish supply chains were relatively weak, with no major incentive to choose Scottish supply chains over other jurisdictions, and weak financial penalties. Moreover, Crown Estate Scotland did not attach any mandatory conditionalities to ScotWind agreements to ensure that companies adhere to Fair Work principles.

Looking ahead to the next round, there is an opportunity to strengthen local supply chain development and stronger conditions to guarantee workers fair pay and conditions. Beyond this, the Scottish Government’s plan to use the initial round of ScotWind revenues - originally allocated to support green energy - to bolster both capital and resource budgets underscores the fragility of a one-off approach. Future Economy Scotland has called on the Scottish Government and Crown Estate Scotland to explore the costs, risks and benefits of taking public equity stakes which, while drawing on capital budgets, must be weighed against the considerable long-term benefits of creating an enduring source of public revenue. 

Tying all of this together is the need for a mission-oriented industrial strategy, implementing new governance models to maximise joined-up delivery, actions to strengthen public sector capabilities, and re-imagining the role of the state to invest in its capacity. If successful, it can mobilise investment to advance social and environmental goals and channel it towards a productive and prosperous economic future. 

While the Scottish Government’s borrowing powers have increased slightly in recent years, they remain very limited and Scotland’s budget is largely determined by decisions at a UK level. This has significant implications for how Scotland responds to immediate and long-term risks and opportunities. At present, the Scottish Government has less flexible borrowing powers than local authorities, despite having higher investment needs. Despite this, the Treasury has been hostile to granting devolved governments greater levels of borrowing powers. 

Under recent previous UK Government administrations, the relationship with the Scottish Government was fractious, often pulling in opposing directions with various levels of animosity. This was highlighted during the post-Brexit settlement, where power was consolidated at Westminster through, for instance, the introduction of the Internal Market Bill. The appointment of Andy Burnham as UK Prime Minister offers a chance to press reset on the relationship between the two governments and ignite a timely dialogue about shifting power from Westminster and the future of devolution. 

Given the magnitude of the fiscal challenges facing Scotland and the current constrained borrowing powers, the UK Government should back an earlier review of the Fiscal Framework. Crucially, the mismatch between the fiscal gap and increased spending and investment needs should generate demands that collectively and effectively challenge Treasury resistance to greater borrowing powers across UK nations and regions, walking the walk on meaningful decentralisation of power. 

Scotland’s budget gap is real, and needs to be closed. But achieving this through spending cuts and ‘efficiencies’ is likely to make Scotland’s economic problems worse, not better. An alternative path forward exists, if the Scottish Government is willing to take it.