Scotland Act 2016 implementation: eighth annual report

5. Block Grant Adjustments, Reconciliations and Indexation

As part of the 2016 Fiscal Framework Agreement, it was agreed that the Scottish Government’s Block Grant would be adjusted to represent the impact of the transfer of greater fiscal powers to the Scottish Government. Deductions to the Budget reflect that the Scottish Government now retains revenues from some devolved taxes, with the devolved social security benefits that the Scottish Government is responsible for reflected through additions to the Budget. These adjustments are called Block Grant Adjustments (BGAs).

2023-24 Developments

Indexation Mechanism

38. Under the original Fiscal Framework agreement agreed in 2016, two indexation mechanisms were used to calculate BGAs – the Index per Capita (IPC) mechanism and the Comparable Model (CM). As part of the 2023 Fiscal Framework Review, it was agreed that IPC would be the permanent methodology for calculating BGAs.

Forecast BGAs

39. The latest forecast BGAs are set out in the Scottish Government’s Fiscal Framework Data Annex^[14].

40. For the 2023-24 Scottish Budget, BGAs were based on forecasts published by the Office for Budget Responsibility (OBR) alongside the 2022 UK Autumn Statement that preceded the Scottish Budget.

41. These forecast BGAs were subsequently used to calculate in-year reconciliations, on the basis of the comparison between the BGAs which underpinned the 2023-24 Scottish Budget and the BGAs agreed at the 2023 UK Autumn Statement. The in-year reconciliations compared BGAs on LBTT, SLfT and social security, resulting in a positive £46 million reconciliation.

Data update: Fiscal Framework Outturn Report 2023 and Scottish Government's Medium Term Financial Strategy

42. The Scottish Government published its annual Fiscal Framework Outturn Report on 29^th September 2023^[15]. The report outlines tax and expenditure outturn data and the implications of this data on the following Scottish Budget.

43. Table 17 of the Outturn Report showed the total provisional reconciliations for the 2024-25 for the Scottish Budget amounted to negative £331.8 million. This is the net impact of the revenue and BGA reconciliations for Income Tax for 2021-22, and for the BGA reconciliations for fully devolved taxes, Fines, Forfeitures and Fixed Penalties, and Social Security Benefits Expenditure for 2022-23. These provisional reconciliations were updated following the publication of final outturn, and the final reconciliations totalled negative £338.0 million, as detailed in the Scottish Budget 2024-25.

44. The Scottish Government’s Medium-Term Financial Strategy (MTFS)^[16] was published in May 2023. Annex C (Fiscal Framework) outlines the forecasts for tax revenues and BGAs, social security benefits expenditure and BGAs, and forecast reconciliations for tax, social security and non-tax revenue at the time of publication. These forecasts were then updated alongside the Scottish Budget 2024-25.

Impact of ONS population delay on Scottish Budget 2023-24

45. Calculations of BGAs rely on updated mid-year population estimates from the Office of National Statistics (ONS). However, all BGAs from the 2023-24 Scottish Budget onwards have been calculated using the ONS mid-year 2020 population estimates. This is primarily due to timing differences between the Scottish and rUK censuses and their subsequent inclusion into the ONS mid-year estimates. Until the Scottish census results are revised into the Scottish population estimates, which the National Records for Scotland (NRS) are undertaking this year, then the relative growth rates between Scotland and the rUK are not able to be calculated on a consistent basis. Consequently, it was agreed with HMT that in the interim the mid-year population estimates for 2020 would be used, with the relative growth rate in that year projected ahead uniformly until the issue was resolved.

46. All BGAs applied from the 2023-24 Scottish Budget onwards will be revisited once population estimates are available with consistent census revised population estimates.

Income Tax Reconciliation

47. Outturn data for Income Tax for 2021-22 was published by HMRC on 6 July 2023^[17] and a reconciliation of negative £389.9 million was applied to the Scottish Budget 2024-25. This was the fifth income tax reconciliation since the implementation of the Fiscal Framework. Further information on the reconciliation can be found in the Fiscal Framework Outturn Report^[18].

Future plans

48. Pension Age Winter Heating Payment: The Social Security benefit Pension Age Winter Heating Payment (PAWHP) will be launched in winter 2024, for which there is a corresponding BGA for the UK equivalent benefit Winter Fuel Payment (WFP). The baseline BGA forecast corresponds to UKG’s WFP expenditure in Scotland in the year prior to its devolution to Scotland (2023-24) and is currently forecast at £175 million.

49. The baseline will be updated once outturn is available. The SFC provided a forecast of PAWHP expenditure in their December 2023 forecasts underpinning the 2024-25 Scottish Budget^[19], which allowed us to calculate a forecast net position.