Ross Stupart

With the UK suffering sluggish domestic growth, falling employment and higher borrowing costs, plus uncertainty around international trade tariffs putting further pressure on growth prospects for businesses, the Chancellor, Rachel Reeves was always going to have a difficult job keeping everyone happy. Yesterday’s ONS statistics highlighted a fall in UK GDP of 0.3% in April. This does not come as much of a surprise with April 2025 being the biting point for the October 2024 National Insurance contributions increases and national minimum wage increases taking effect which have inevitably led to investment caution within business. These changes have had a big limiting effect on the hospitality sector which is a strong contributor to economic activity in Scotland.

She was clearly conscious of the impact the Spending Review could have on the Scottish voter base, as she noted at various points in her speech where spending and investment proposals will benefit Scottish businesses, for example with investments in innovation, digital technology, and local growth funds. In addition, Scotland should benefit from investments in defence and Great British Energy.

The Spending Review provided some key announcements on spending budgets for critical services, such as a 3% real terms increase in the NHS budget and a £39bn, 10-year investment in affordable homes. The Spending Review notes that the Scottish Government will receive an increase of £2.9bn to its block grant to fund services, and a further £510m for capital projects for improving infrastructure.

Two of the key areas of spend, healthcare and housing policy, are devolved to the Scottish Government, and therefore the Spending Review strategies will not affect Scotland. It’s clear that the NHS in Scotland is stretched, and demand and supply of housing stock are misaligned. Scotland will need the Scottish Government to commit a sizeable amount of its budget to support the healthcare sector and to drive the building of affordable homes.

The Scottish Government is due to set out its formal response to the 2025 Spending Review on 25 June in its Medium Term Financial Strategy announcement. In the meantime, the Scottish Finance Secretary has expressed disappointment at the UK government funding for Scotland, noting that the Block Grant provided will only increase 0.8% in real terms. As the Scottish Government makes its own spending decisions in many areas that are covered by UK government departments, it may have some tough decisions to make in advance of the 25 June announcement.

Will the Scottish Government have to pull back on welfare spend, which it has historically been reluctant to do, to free up more funding for health, and to get Scotland building again? Will The Scottish Government have to consider raising the tax take to ease the spending pressure? The latter maybe a possibility, particularly given that many expect the UK government to take a ‘spend now, tax later’ approach in this spending review, and therefore tax hikes are looking likely.

Interestingly, the Scottish Government reacted to the Spending Review by accusing the UK government of not prioritising Scotland’s strategy in spending decisions. This week it has become apparent that a major employer that has had a long-term manufacturing presence in Scotland, Alexander Dennis, announced it was considering closing its Scottish facilities to centralise operations in Scarborough. It has been noted that only around 17% of the Scottish Government’s Zero Emission Bus Challenge Fund buses were procured from Scotland from Alexander Dennis, with the majority of the buses being procured from outside Scotland.

Perhaps there is a need for the Scottish Government to rethink its own industrial strategy and spending decisions in light of this week’s announcements?

Ross Stupart is regional managing partner for Scotland and Northern Ireland at RSM UK