Local authorities, charities, and public sector organisations across Scotland have joined First Minister John Swinney in urging the UK Government to provide additional funding to address the impact of increased employer National Insurance (NI) contributions.
In a joint letter from Mr Swinney and Shona Morrison, president of local authority body COSLA, Chancellor Rachel Reeves was asked to adopt an “actual cost approach” to funding the rise. This comes in response to the Chancellor’s October budget, which announced the NI hike alongside funding for the public sector. However, the Scottish Government has argued that the allocated funding is insufficient to meet Scotland’s needs due to its larger public workforce.
Disproportionate impact on scotland
The Scottish Government estimates that the NI increase could cost public sector employers in Scotland as much as £700 million, with an additional £75 million impact on the charity sector. The funding share allocated through the Barnett formula, calculated at £290 to £350 million, would fail to cover these costs, leaving a significant shortfall.
The letter, supported by 48 public and third-sector organisations, including the Scottish Trades Union Congress (STUC), Scottish Women’s Aid, Rape Crisis Scotland, and the Scottish Council for Voluntary Organisations (SCVO), highlighted the financial strain this would place on Scotland’s public services.
The letter stated:
“Whether applied to public sector employers, or a broader public services cohort of employers, a Barnett share of the funding which is made available based on the actual costs to UK departments and local government in England will fall some considerable way short for Scotland given our relatively larger public sector workforce.
“As a result, such an approach would see the Treasury essentially profit from public service employers in Scotland, while the equivalent employers in England are fully reimbursed.
“We ask you therefore to consider carefully the case for taking an actual costs approach to the additional funding to be provided and to confirm this before the final stages of the Scottish budget to allow us to plan appropriately.
“The impact for our communities and for the effective management of public finances will otherwise be highly damaging.”
Call for dialogue
The Scottish Government and COSLA have invited the Chancellor and her officials to engage in detailed discussions, seeking meaningful dialogue to address the funding disparity. The letter emphasised the urgency of resolving the issue before the finalisation of the Scottish budget at the end of February, to allow for effective planning and resource allocation.
UK government response
A spokesperson for the UK Government defended the existing financial settlement, stating:
“The budget delivered more money than ever before for Scottish public services, and the Scottish Government receives over 20% more funding per person than equivalent UK Government spending.
“It is for the Scottish Government to allocate this across its own public sector and meet the priorities of people in Scotland.
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“It will also receive additional Barnett funding on top of this record £47.7 billion settlement as part of support provided in relation to changes to employer national insurance.”
Despite these assurances, the Scottish Government and the organisations supporting the letter maintain that the current funding arrangement falls short of what is required to mitigate the financial pressures caused by the NI increase.
Broader implications
The dispute over funding reflects broader concerns about how the Barnett formula is applied in contexts where Scotland’s unique public sector structure creates additional financial burdens. The Scottish Government has consistently argued for greater fiscal autonomy to address these disparities.
As the Scottish budget deadline approaches, the outcome of this debate will have significant implications for the delivery of public services and the sustainability of charities and third-sector organisations that play a critical role in supporting vulnerable communities.
The push for an “actual cost approach” underscores the ongoing challenge of balancing regional financial needs within a centralised funding system, with both sides likely to face increased scrutiny over their handling of this contentious issue.
