Scotland Act 2016 implementation: eighth annual report

9. Fiscal Framework Implementation

The Fiscal Framework is an agreement made by the Scottish and UK Governments that determines how the Scottish Government is funded, as well as underpinning the powers set out in the Scotland Act 2016. This chapter covers further areas of Fiscal Framework implementation relevant to this report; the 2023 review of the Fiscal Framework, the independent report accompanying the review and progress on policy spillovers.

2023-24 Developments

Fiscal Framework Review 2023

102. The 2016 Fiscal Framework agreement stated that a review of the Fiscal Framework should be undertaken by the Scottish and UK Governments after the Scottish Parliament elections in 2021, informed by an independent report.

103. Following a review of the arrangements in the 2016 Fiscal Framework, the Scottish and UK governments came to an agreement on a revised Fiscal Framework Agreement, which was published on 2 August 2023^[25]. The summary of the changes agreed are detailed in table 9.1:

Table 9.1: Agreed changes to the Fiscal Framework

	2016/17-2023/24	2024/25 onwards
BGA Mechanism	Run both IPC and Comparable methods, but only use the IPC method in practice.	Simplify: apply IPC on a permanent basis.
Resource borrowing	Up to £300m p.a. to cover forecast error, £1.75bn cumulative.	Up to £600m p.a. to cover forecast error, £1.75bn cumulative, both indexed to inflation.
Capital borrowing	Up to £450m, p.a.; £3bn cumulative cap.	Up to £450m p.a., £3bn cumulative cap, both indexed to inflation.
Reserve drawdown limits	£250m resource; £100m capital.	Abolished.
Overall reserve limit	£700m.	£700m indexed to inflation.
VAT Assignment	The two Governments have agreed that VAT assignment will be implemented in 2019-20	How and when to implement VAT Assignment will be discussed at a future Joint Exchequer Committee.
Crown Estate	Deduction to the block grant of £6.6m p.a.	Deduction to the block grant profiled at £10m / £10m / £15m/ £20m / £40m from 2024-25 to 2028-29. Fixed in nominal terms at £40m beyond 2028-29.
Fines, Forfeitures and Fixed Penalties	Indexed Block Grant Adjustment to fines and penalties revenue.	Flat annual deduction of £25m to the block grant.
Coastal Communities Fund	Baseline addition made to block grant equivalent to UKG spending on CCF in year prior to transfer.	Absorbed into Barnett (no impact on SG budget).
Scotland Specific Economic Shock	Up to £600m resource borrowing capacity when triggered.	Abolished.

104. It was agreed that the existing Indexed Per Capita method for calculating BGAs for devolved taxes and social security benefits would be adopted on a permanent basis. This means that Scotland will continue to be protected from slower population growth.

105. The Scottish Government can now borrow up to £600 million annually for in-year cash management and forecast error. As a result, the provision of a Scotland-specific Economic Shock (which would trigger an increase to the resource borrowing capacity to £600 million) has been abolished. The reserve drawdown limits of £250 million for resource and £100 million for capital have also been abolished.

106. It was agreed in the review that annual and cumulative borrowing and reserve limits will be set in 2023-24 prices, meaning the limits will be uprated annually using the OBR's GDP deflator forecast at the time of the Scottish Government draft Budget. This indexation for inflation will stop limits from being eroded over time.

107. All the agreed changes to the Fiscal Framework took effect from 2024-25. The 2016 Fiscal Framework therefore still applied for 2023-24.

Independent Report on BGAs which informed the Fiscal Framework Review

108. The Scottish and UK Governments jointly commissioned an independent report on 27^th June 2022 to inform the review of the Fiscal Framework. The report, written by Professor David Bell, David Eiser and David Phillips was published alongside the Fiscal Framework Agreement on 2 August 2023^[26].

109. This report evaluates the current and alternative methods for calculating BGAs and the extent to which different methods for calculating BGAs are consistent with the Smith Commission's principles.

Progress on policy spillovers

110. The Fiscal Framework includes a provision for policy spillovers. This is when one government makes a policy decision that has an impact on the tax receipts or expenditure of the other. When this happens, the government that made that decision should reimburse the other in cases of additional costs, or receive a transfer in the case of a saving. Both governments must jointly agree on any decision or transfer relating to a spillover.

111. After carrying out analysis using the jointly agreed Social Security spillovers methodology, Scottish Government and DWP analysts agreed in November 2022 that the devolution of Scottish benefits produced no material spillover effects for either Government in 2021-22.

112. This analysis continues for financial year 2022-23 and again uses the Social Security spillovers methodology to investigate if any passporting interactions between devolved and reserved benefits has led to any costs or savings for either Government. No agreements have yet been reached for 2022-23 or 2023-24.

Future plans

113. The Fiscal Framework states that reviews should take place on a 5 yearly basis but not more than once in any UK or Scottish electoral cycle. It will be open to either government to propose changes to the fiscal framework as part of future reviews. The Joint Exchequer Committee will jointly agree conclusions, recommendations and revisions of the review.

114. In the meantime, work is being carried out to implement the changes agreed in the 2023 Agreement. This includes the governments agreeing and passing a Scotland Act Order to increase the cumulative capital and resource borrowing limits detailed in the Scotland Act 1998.