Agreement reached on Fiscal Framework

The Scottish and UK Governments have reached agreement on the Fiscal Framework, providing greater long-term funding clarity for Scotland and some more flexibility on how the Scottish Government manages the public finances.

After a joint review, the two governments have agreed to permanently adopt the existing Indexed Per Capita (IPC) method used to calculate the funding received from the UK Government.

This enshrines the current way the Fiscal Framework operates, taking into account the devolution of some tax and social security powers and protecting the Scottish Budget from the risk of Scotland’s population growing at a slower rate from the rest of the UK.

In addition, the amount the Scottish Government can borrow to mitigate against errors in forecasting will be increased from £300 million to £600 million, with no limits to the amount that can be drawn from the Scotland Reserve, providing some greater flexibility to handle funding volatility.

Borrowing and reserve limits will grow in line with inflation and will therefore be maintained in real terms.

Deputy First Minister Shona Robison said:

“This is a finely balanced agreement that gives us some extra flexibility to deal with unexpected shocks, against a background of continuing widespread concern about the sustainability of UK public finances and while it is a narrower review than we would have liked, I am grateful to the Chief Secretary to the Treasury for reaching this deal.  

“As I set out in the Medium-Term Financial Strategy, we are committed to tackling poverty, building a fair, green and growing economy, and improving our public services to make them fit for the needs of future generations.

“We still face a profoundly challenging situation and will need to make tough choices in the context of a poorly performing UK economy and the constraints of devolution, to ensure finances remain sustainable.”

Background

The Fiscal Framework Agreement

Joint communique with His Majesty's Treasury

The Fiscal Framework sets out the Scottish Government’s financial arrangements including how its UK Government funding is calculated. It also gives the power to borrow money to handle the tax and social security reconciliations, through which the Budget is adjusted to correct errors in forecasting. 

The Fiscal Framework was agreed between the Scottish and UK Governments in 2016, following recommendations made by the Smith Commission – a cross-party group who produced a report on further devolution in Scotland. The original agreement states that a review of the Fiscal Framework would take place after a parliament’s worth of experience to consider how well the agreement was working and whether any changes needed to be made. 

The 2016 agreement introduced annual adjustments to the funding received from the UK Government – known as the Block Grant – to take into account the devolution of new taxes and social security expenditure to Scotland. It was agreed at the time that the Indexed Per Capita (IPC) method would be used until another solution was agreed.

An independent report which considered various methods of calculation and how they met the principles set out by the Smith Commission was jointly commissioned with the UK Government in 2022. The Scottish Government has also published its response to the call for evidence which took place ahead of the independent report. 

The Scotland Reserve allows the Scottish Government to transfer funds between financial years. The Scottish Government also has the ability to add to the Reserve each year, should there be any money left over at the end of a financial year, which can then be used in subsequent years. There was previously a limit to how much of these funds could be used each year; removal of these limits allows for greater flexibility when using in the future. 

The Scottish Government’s Medium-Term Financial Strategy