Despite this, the institute’s latest quarterly economic assessment reveals current expectations are that growth in 2025 will be an improvement compared to 2024.

In the Deloitte sponsored economic commentary, the institute’s economists are forecasting that growth in 2024 will end up at 0.9% and will be followed by 1.3% growth in 2025 and 1.2% growth in 2026.

The forecast for 2025 is a significant revision up from previous estimates, driven by large increases in government spending during 2025-26. The concern, however, as the latest analysis shows, is that this growth could be a short-term boost rather than leading to increased growth in the medium to long term.

Analysis of the information published alongside the UK Budget shows that in the medium term, the measures announced by the UK government in the Budget will mean that inflation and interest rates are higher for longer and real incomes lower than would otherwise be the case.

Professor Mairi Spowage, director of the institute, said: “The UK government were keen to present their Budget in October as supporting growth, and that they had avoided tax increases on working people.

“However, the analysis alongside the Budget shows that that impact of measures will reduce growth in the medium term and that tax increases will mostly be passed through to workers through less employment and fewer wage increases.

“The UK government will be hoping that improvements in public services will start to be felt, given extra public spending, and that growth will surprise on the upside to make future fiscal events easier. The reaction of businesses to the budget, with taxation increasing as a concern, may make that more difficult.”

Douglas Farish, head of tax for Deloitte in Scotland, said: “Businesses across the country are navigating somewhat of a balancing act, striving to attract and retain top talent while managing cost pressures and economic uncertainty.

“Demographic shifts and evolving workplace demands are straining labour markets, and the rise of AI is reshaping the skills businesses require, underscoring the need for adaptive workforce strategies that ensure innovation and productivity thrive alongside human expertise.”

In the Commentary, the main messages from the Scottish Budget are also analysed. As a result of the UK government’s Budget, the Scottish Government had more money to allocate for 2025-26 than had previously been expected, with an £3.4bn uplift on the previous envelope for 2025-26. In particular, there was a considerable uplift in capital spending, which has allowed key capital budgets, such as the affordable housing programme, to have funding restored.

Dr João Sousa, deputy director of the institute, said: “The Scottish Government had more flexibility than they were likely expecting given the increases in funding for 2025-26.

“Overall, though, this budget in December had one eye on the Holyrood election in May 2026, with announcements on mitigation of the two-child benefit cap from April 2026.

“This issue has proven key, with Scottish Labour now set to abstain on the Budget which is likely to ensure it will pass.

“Wider issues about fiscal sustainability remain, though, with higher public sector pay in Scotland, the much larger public sector, and the increasing proportion of the Scottish Budget, which is taken up by social security payments, which will increase further given the decision on the two-child cap.”