Scotland Act 2012 financial provisions implementation: fifth annual report

Chapter 3 - Block Grant Adjustments, Reconciliation and indexation

45. Following the Fiscal Framework agreement, changes in the Scottish Government's block grant will continue to be determined via the operation of the Barnett Formula. The block grant to the Scottish Government will then be adjusted to reflect the retention in Scotland of devolved revenues. As agreed in the framework, the adjustments involve two elements: (i) an initial block grant baseline adjustment; and (ii) an indexation mechanism.

46. The general position as set out in the fiscal framework and the associated technical annex ^[17] is that the initial baseline adjustments for each tax will be equal to the UK Government's receipts from the relevant tax generated in Scotland in the year immediately prior to the transfer of the tax to Scotland (year 0). Indexation will then be applied to the year 0 baseline to determine the block grant adjustment ( BGA) for each tax in the first year of devolution (year 1), and indexation of the BGA will be applied annually thereafter. The full indexation formulae and methodologies for BGAs can be found in part two of the fiscal framework technical annex.

47. Over the period to 2021-22 the BGAs for tax will be indexed using the Comparable Model ( CM) and the results will then be adjusted to achieve the outcome delivered by Indexed Per Capita ( IPC). The figures in this chapter refer to figures achieved by the IPC method. The BGAs based on both the CM and IPC mechanisms can be found on page 20 of the Scottish Government's Draft Budget for 2017-18. ^[18]

Scotland Act 2012

48. Implementing the financial provisions for the Scotland Act 2012 powers has required three BGAs - in respect of SRIT and in respect of LBTT and SLfT -the two fully devolved taxes.

49. Prior to the fiscal framework agreement, the BGA in respect of SRIT for 2016-17 was set equal to the forecast revenue raised in Scotland (£4,900m). The net effect of this BGA was zero because no change in rates was made in this year. The revenue added to the Scottish budget was therefore equal to the reduction in the block grant. There will be no reconciliation to this adjustment once outturn data becomes available because of the agreement that the UK Government bears forecasting risks in the initial transitional period. The Scottish Government's spending power in 2016-17 has therefore been unaffected by forecast or actual receipts from SRIT.

50. Prior to the fiscal framework agreement, for LBTT and SLfT, a specific one-year agreement was reached with the UK Government in January 2015 on the BGA for 2015-16. The combined figure agreed and applied was £494m. This figure will not be revisited and will not be treated as the baseline to which indexation will be applied to arrive at the BGAs for LBTT and SLfT in respect of 2016-17 onwards. For 2016-17, the Scottish and UK Governments agreed a provisional one-year BGA of £600m for LBTT and SLfT. This will be revisited now the Fiscal Framework has been agreed but to ensure budget certainty, any revision will not take place until outturn data is available after 2016-17.

51. Following the Fiscal Framework agreement, the baseline adjustments for LBTT and SLfT, to which the indexation factors will be applied to calculate the BGA in respect of 2016-17 and future years, will be set equal to estimated outturn receipts from the relevant UK taxes in Scotland in 2014/15. These figures are £468m for LBTT and £149m for SLfT. Using the indexation outcome delivered by Indexed Per Capita ( IPC), the BGAs for LBTT and SLfT for 2017-18 are £545m and £119m respectively.

52. As per the framework, the BGAs are produced based on the latest available information at the time of the Draft Budget. Once the outturn data is available for the Scottish tax revenues and the BGA, a reconciliation will be carried out as per the timetable set out in the fiscal framework. For LBTT and SLfT, this is likely to be available six months after the end of the financial year.

Scotland Act 2016

53. For 2017-18 and beyond, the Scottish income tax powers under the Scotland Act 2016 will apply. The baseline block grant adjustment for income tax has been calculated at £11,750m. This is based on OBR forecasts of total Non-Savings, Non-Dividend income tax receipts in Scotland under UKG income tax policy in 2016-17, and will be reconciled to outturn.

54. Taking into account the Scottish income tax rates and bands agreed by the Scottish Parliament on 21 February 2017, the Scottish Government's forecast figure for Scottish income tax receipts for 2017-18 is £11.857 billion. This is the sum that will be available to the Scottish Government to draw down from Treasury throughout that financial year. Until reconciliation to outturn, the net impact on the Scottish budget after the Block Grant Adjustment ( BGA) relating to income tax is therefore £107m in additional revenue for 2017-18.

55. Once the outturn data is available for Scottish income tax, a reconciliation will be carried out as per the timetable set out in the fiscal framework. For Scottish income tax outturn data is likely to be available 15 months after the end of the financial year.