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Scottish Finance Secretary Shona Robison has warned a £300m increase in UK government funding “simply won’t cover” a planned rise in employer National Insurance contributions.
Treasury officials in London are said to have told their counterparts in Edinburgh that they should receive between £295m and £330m extra to pay for additional public sector staff costs.
A UK government source told BBC Scotland News there is “hundreds of millions of pounds” heading to Holyrood.
However, Robison said more than £500m would be needed to cover the staff costs of those directly employed by in the public sector, rising to £750m when indirect employees such as those in childcare, colleges or social care are included.
“It means the likes of hospices and GP practices face far greater running costs to simply keep their doors open,” she said.
“Clearly, the Labour government expect the shortfall of hundreds of millions to be absorbed by cuts to Scotland’s public services. Let me be clear, that is nothing less than Westminster austerity through the back door.
“Labour need to fully fund their decision to avoid irreparable damage to our public services in Scotland.”
The finance secretary called for “urgent and formal clarity” from the UK government ahead of the Scottish Budget, which is due to be announced next Wednesday.
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Chancellor Rachel Reeves announced the National Insurance change in the UK Budget last month to boost public service funding.
Reeves said Scotland would receive £3.4bn in additional funding in 2025-26 when she laid out her tax and spending plans – though this did not include compensation for National Insurance.
The UK government source said the extra £300m would mean the Scottish government had “no more excuses”.
They added: “Scots expect delivery from the SNP and to use this money to reduce NHS waiting times and raise attainment in our schools – not fill in a budget black hole created by years of financial mismanagement and waste.”
The Scottish government is also set to receive an additional £1.5bn for this financial year, 2024-25 – though it said this was in line with its budget expectations.
National Insurance contributions are the UK’s second-largest revenue stream behind income tax.
It is paid by workers and the self-employed on earnings and profits, and by employers on top of the wages they pay out.
This, of course, applies to public sector employees who work for the Scottish government.
About 600,000 people are employed in Scotland’s public sector, making up 22% of the total workforce – compared to about 17% in the UK as a whole.
That fuelled concerns at Holyrood that Scotland would be short changed if compensation for the National Insurance increase is not proportional to its public sector.
A Scottish government spokesperson said the Scottish Parliament had agreed the UK government should reimburse the cost of the change – “over £500m”.
They said: “This UK government policy risks hampering economic growth and damaging public services and whilst discussions with the Treasury are ongoing, we still do not have certainty ahead of the Scottish budget.”
‘Tough’ choices
The Fraser of Allander Institute, an economics research unit at the University of Strathclyde, has also estimated that the Scottish government will be left about £500m short as a result of the tax changes.
Director Mairi Spowage said: “You could say, well, the larger public sector in Scotland, the fact that it’s better paid, that’s sort of down to the decisions of Scottish government.”
But she warned it would be “tough” for SNP ministers to cover a £200m shortfall.
Spowage added: “It will definitely be challenging to absorb that in other parts of the budget.”
Scottish Conservative leader Russell Findlay described the National Insurance increase as “catastrophic” and “counter-productive”.
He said it was “entirely proper” for the UK government to provide compensation.
“It’s now incumbent on the SNP government to ensure that that’s passed on,” he said.
“But that will protect the public sector who have been hammered by the NI rise, but what it won’t do is protect the private sector.”
