UofG Centre for Public Policy

Article by Professor Graeme Roy 

This article was originally published in The Herald on 10 November 2025. 

Later this month, the Chancellor will deliver her second Budget – a moment that will shape the fiscal reality for governments across the UK.  

Speculation is rife about what Rachel Reeves will do. Last month, the Resolution Foundation warned that “a combination of policy U-turns since the last Budget, higher borrowing costs and a likely downgrade to the UK’s productivity outlook mean significant fiscal consolidation will be needed.” The Institute for Fiscal Studies believes the government has a £20 billion gap to fill to stay within their limits on debt and borrowing.  

As the Chancellor has now herself set out, that sets up difficult choices between political priorities and economic constraints. 

Much of the challenge stems from a familiar culprit: weak productivity. If, as expected, the Office for Budget Responsibility revises down its economy forecasts, the entire UK fiscal arithmetic tightens. Lower productivity means weaker growth and reduced tax revenues. Moreover, because the UK’s fiscal rules are expressed as ratios to the overall size of the economy, a smaller economy creates less fiscal headroom.  

But if this is the UK Government’s fiscal challenge, why does this matter for the Scottish Government? After all, devolution was meant to give Holyrood greater fiscal autonomy. 

The answer lies in the continuing interdependence of the two systems. The Scottish Budget remains heavily influenced by decisions made in Westminster - both through the block grant (which still provides the majority of funding) and through the operation of the Fiscal Framework, which adjusts that grant to account for devolved taxes and social security. 

If the UK Government responds to a weaker outlook by scaling back departmental spending, the effect on the Scottish Budget depends on where those cuts fall. If they are concentrated in devolved areas such as health or education, Scotland’s block grant will be worse off from smaller Barnett consequentials. If, instead, the tightening is focused on reserved areas such as defence or pensions, the direct effect on the Scottish Budget will be smaller, even if households and the wider economy still feel the impact. 

Tax decisions matter just as much. If the Chancellor opts to raise a reserved tax such as VAT, the Scottish Budget will see no direct change. But a rise in income tax in England would have important consequences. Under the Fiscal Framework, an “adjustment” - the Block Grant Adjustment - is made each year to reflect the fact that some income tax revenues are received by the Scottish Government. That adjustment grows in line with equivalent revenues in England. 

So, if income tax rates rise south of the border, English tax receipts grow faster - and the adjustment increases. Unless the Scottish Government mirrors those tax rises, its budget will fall relative to what it otherwise would have been. 

A hypothetical example illustrates this well. The Resolution Foundation - whose former chief executive Torsten Bell now serves as a Treasury Minister - has floated a package combining a 2p rise in income tax with a 2-percentage-point cut in National Insurance. For taxpayers in Scotland, the National Insurance cut would still apply, since that remains reserved. But the income tax rise would not. The result if the Scottish Government made no changes to income tax? Scottish taxpayers would see a small net tax cut, while the Scottish Budget would shrink from a larger Block Grant Adjustment. 

It is a quirk of our system that UK fiscal policies designed to protect spending and increase the tax burden, could simultaneously mean less money for Holyrood and lower taxes for Scottish households. These interactions are complex and rarely visible, yet they shape the choices available to Ministers in Edinburgh as much as those in London. 

The timing adds to the intrigue. The Scottish Government’s Budget follows in January, and a Spending Review – the first in several years – will accompany it.  

The reality, however, is that the Scottish Government’s Budget remains linked to UK decisions.  A downgrade in the OBR’s forecasts, and tweaks to the UK tax system, may sound technical, but carry significant knock-on effects for spending and public services here.  

The hope had been that we had moved on from regular fiscal firefighting. Yet this UK Budget looks set to confirm that the interplay between Westminster and Holyrood responsibilities will continue to test policymakers for some time. With a Scottish election just months away, the stakes could hardly be higher. 

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UofG Spotlight podcast – UK Budget special 

Look out for a special episode of our UofG Spotlight podcast coming at the end of the month - we’ll be bringing you first reaction and analysis of the UK Budget due on 26 November, from Professor Graeme Roy and Dr David Waite. 

First published: 13 November 2025