Finance and Public Administration Committee: finance update

A. Guide to the Autumn Budget Revision

1. The Autumn Budget Revision is part of the annual budget process. The budget process for 2022-23 commenced with the publication of the Scottish Budget and annual Budget Bill which provided details of the Scottish Government's spending plans. These plans (as amended at Stages 2 and 3 of the Budget Bill) were approved by the Scottish Parliament on 10 February 2022.

2. Once the Budget Act has been approved by the Scottish Parliament, there are usually two opportunities to amend the budget as the year progresses - the Autumn Budget Revision and a Spring Budget Revision.

A.1 Summary of the Autumn Budget Revision

3. The Autumn Budget Revision is routine parliamentary business that proposes amendments to better align the Government's budget with its planned spending profile.

4. The changes proposed in the Autumn Budget Revision result in an increase in the approved budget of £805.9 million from £56,179.2 million to £56,985.1 million.

5. The changes to the Budget are broken down in to four main areas:

• A.2 - Funding changes to reflect deployment of available resources to portfolios (total net increase to the budget of £691.5 million);
• A.4 - Technical adjustments (net increase to the budget of £106.5 million);
• A.3 - Whitehall transfers and HM Treasury allocations to the Scottish Government (£7.9 million); and
• A.5 - The transfer of resources between Scottish Government portfolios.

6. The main changes included under each heading are categorised in table 1.2 in the Budget Revision document and summarised below.

A.2 Funding Changes

7. Funding changes represent additional budget that provides spending power within portfolios and programmes, and also some reductions where funding has been returned to the centre for redeployment elsewhere. Table 1.2 provides the funding changes on a net basis by portfolio of £691.5 million, however the gross impact is shown below.

A.2.1 Gross Funding Changes

8. The largest element of funding deployed in the budget revision relates to the cost of living measures announced by the Cabinet Secretary for Finance and Economy during the Stage 3 Budget debate on 10 February. As there was not sufficient time to reflect these amendments to the Budget Bill, this funding is allocated at the next available opportunity which is the Autumn Budget Revision.

9. The statement included a commitment to fund a Council Tax reduction scheme for households in bands A-D amounting to £150 per household. This has been included at a cost of £280 million.

10. The other element of the Cost of Living Support package announced in February was £10m of funding provided to the Fuel Insecurity Fund. This has subsequently been increased to £20 million following the conclusion of the Emergency Budget Review and the revised amount is included within this Budget Revision.

11. Other gross funding increases relating to the Emergency Budget Review are the £18.9 million Scottish Child Bridging payment and the £5 million for Discretionary Housing Payments. Further details on the EBR are included in section B.

12. The Local Government allocation also includes the £140 million of additional funding announced by the Deputy First Minister on 4^th August to support COSLA in their negotiations with the local government workforce as well as £120.6 million of capital support.

13. Following the First Minister's statement on the 16^th of March the Social Justice, Housing and Local Government portfolio has also been allocated £15.8 million to facilitate the effective and timely integration of refugee arrivals from Ukraine in partnership with local authorities and the Scottish Refugee Council.

14. All amounts detailed in paragraphs 8 to 13 have been allocated to the Social Justice, Housing and Local Government portfolio and total £600.2 million

15. The second largest allocation (£180 million) relates to Police and Fire Pensions which has been added to the Justice and Veterans portfolio. This is a volatile demand led budget with additional budget pressure beyond the core allocation managed in year.

16. £47 million is being provided to the Whole Family Wellbeing Fund within the Education and Skills portfolio. The funding is part of a larger commitment (£500m) over the lifetime of Parliament to drive transformational change in how families are supported, shifting investment to early intervention and prevention, so that families can access support before crisis point.

17. Transport Scotland have been allocated an additional £47 million of funding which was carried forward from 2021-22 in the Scotland Reserve as a targeted underspend to meet expected additional commitments. These amounts are split between £25 million of additional support for Rail Services in Scotland and £22 million of funding for free travel for Under 22s. This has been formally allocated to the NZET portfolio.

18. £41 million has been allocated to the Health and Social Care portfolio. This additional funding is to aid the ongoing recovery from the pandemic and to address the cost of living issues of the health and social care workers

19. Additional gross funding changes include:

• £7 million to Highlands and Islands Enterprise in Finance & Economy for the Cairngorm Furnicular.
• £6.7 million to Ferguson Marine in Finance & Economy for additional funding for the build and completion of vessels 801 and 802.
• £3.9 million to Tourism in Finance & Economy to fund visitor management projects.
• £2.8 million to Education and Skills for Capital projects, specifically within Disclosure Scotland and the Student Awards Agency Scotland.

A.2.2 Reductions to Portfolios

20. The largest reduction in funding within the budget revision is the £91.8m of capital funding which has been returned by Energy. These amounts are spread across 3 areas (Energy Efficiency, Heat in Buildings and Energy Industries Divisions) and reflect lower than anticipated uptake from both private sector and local authority partners. The ongoing workforce and supply chain issues in the construction sector is a contributory factor to the demand issues. By returning these forecast underspends early in the financial year, Energy have allowed these amounts to be redistributed to other priority areas.

21. £23 million of Financial Transactions budget has also been surrendered by Energy Efficiency. This again reflects lower than expected demand in the current year.

22. £28 million of budget has been surrendered by Digital Connectivity within the Finance and Economy portfolio. This relates to a forecast capital underspend on the R100 programme. Following early delays in the programme linked to both Covid-19 and supply chain issues the timeframe for these works has been extended with forecast spend in the year reduced.

23. £20.7 million released from Concessionary Fares and Bus Services within the Net Zero, Energy and Transport portfolio to reflect lower than expect demand for free Under 22 travel. It is important to note there is no change in the qualification criteria; this is a result of lower than forecast uptake.

24. £33.7 million deferral of UK Government Ring-fenced funding which will be returned to Rural Affairs in future years.

25. Following a review of recruitment plans for 2022-23, Social Security Scotland have returned £20 million of resource budget. This has no impact on benefit expenditure.

26. Further funding reductions include:

• £9.5 million of savings in Agriculture and Rural Economy through a combination of revised forecasts and modifications within the Scottish Rural Development Programme.
• £5.3 million of savings in the capital budget in Finance and Economy in respect of the Shared Services Programme.
• £5 million from Scottish Forestry within the Net Zero, Energy and Transport portfolio to reflect additional anticipated EU funding.
• £2.5 million capital funding from Forestry and Land Scotland Grants within the Net Zero, Energy and Transport following the decision to expedite spending in 2021-22.

A.3 Whitehall Transfers

27. There are two specific Whitehall transfers and allocations from HM Treasury recognised in the Autumn Budget Revision. The net positive impact on the Scottish Budget is £7.9 million.

28. These include £6.5 million from Money Advice Service for the allocation of Scotland's share of the Debt Advice Levy and a transfer from the Cabinet Office of £1.3 million for Cyber Security. These amounts have been passed directly to Social Justice and Safe and Secure Scotland respectively.

A.4 Technical Adjustments

29. In line with past years, the Autumn Budget Revision recognises a number of technical changes which are essentially budget neutral and do not provide additional spending power for, or detriment to, the Scottish Government. The net total changes in this year's Autumn Budget Revision are £106.5 million and are summarised below.

IFRS16 adjustments:

30. Following the implementation of International Financial Reporting Standard 16 ('IFRS 16') by the International Accounting Standards Board (IASB) the accounting treatment of leases has been significantly altered.

31. Previously a distinction was made between finance leases, where ownership transfers upon conclusion of the lease agreement, and operating leases, where ownership does not transfer. A finance lease was considered to be an asset of the lessee. The asset was recognised on the entity's balance sheet with a corresponding liability also recognised. An operating lease did not consider the lessee to own the asset. Neither the asset or the corresponding liability was recognised on the entities balance sheet and the annual rental fee was included as a resource costs.

32. IFRS 16 removes this distinction. If an entity enters into a lease where it has a right-of-use ('ROU') over an asset, it must be recognised on the entity's balance sheet as an asset with the corresponding liability over the agreed length of lease.

33. The Scottish Government is transitioning to IFRS 16 in 2022-23 and the first batch of IFRS 16 adjustments have been included in the Autumn Budget Revision. The net total changes as a result of IFRS 16 are £110.3 million.

34. These changes require additional capital and non-cash budget cover to be applied for existing and new assets under lease to allow for the reclassification and subsequent depreciation. There will also be a change to the resource budget position as amounts previously included as rent are no longer budgeted for in the same way, with interest inherent in the lease the only element that is now charged against fiscal resource budgets.

35. Further IFRS16 adjustments will be included in the Spring Budget Revision document as further work is required to refine the precise impact in some areas.

36. Ring-fenced budget cover is being provided by HM Treasury to support this change in accounting treatment and the Scottish Government's discretionary funding will not be impacted. Final IFRS16 budget cover requirements will be provided to Treasury ahead of the UK Supplementary Estimates.

Other Technical Adjustments:

37. Social Security Scotland have returned £7.3 million of non-cash budget following a review of depreciation requirements for the year. This is resulting in a reduction in the Social Justice, Housing and Local Government portfolio's non-cash budget.

38. There is also a reduction to the Rail Services non-cash budget of £1.5 million.

39. Other technical adjustments to the Expenditure Limit budget include £5 million for the Sleeper Service related to a prior year pre-payment.

A.5 Internal Transfers

40. There are a number of internal transfers within the Scottish Block as part of the Spring Budget Revision process. Transfers between and within portfolios are 'zero-sum'.

41. The significant budget internal transfers between portfolios include:

• Transfer from Health & Social Care to Education & Skills to pay teaching grant for Nursing and Midwifery students in Scotland (£64 million);
• Transfer from Education & Skills to Social Justice, Housing & Local Government to fund the Free school meals expansion (£42.0 million);
• Transfer from Education & Skills to Social Justice, Housing & Local Government to provide funding for summer programmes and free school meals holiday alternatives (£31.8 million);
• Transfer from Education & Skills to Social Justice, Housing & Local Government for Additional Support for Learning in Equalities and Inclusion (£15 million)
• Transfer from Social Justice, Housing & Local Government to transfer grant aided expenditure for Ferry funding to Transport Scotland (£13.9 million);
• Transfer from Justice & Veterans to Scottish Courts and Tribunal Service to support the Recovery Renewal and Transformation Fund (£12 million).

42. The Autumn Budget Revision records a small number of internal portfolio transfers which have no effect on the portfolio totals, but play a role in ensuring effective internal budget management. These include:

• £399.5 million of resource budget being transferred from Rail Services to Scottish Rail Holdings (SRH) within NZET.
• £312 million of capital budget being transferred from Rail Services to Scottish Rail Holdings.