Fiscal framework: factsheet

Block grant adjustments

Following the introduction of the fiscal framework, the Scottish block grant continues to be calculated by the Barnett Formula, but an adjustment is made to reflect (i) that some of the Scottish budget is now funded by Scottish tax revenues that were previously retained by the UK Government, and (ii) responsibility for certain social security expenditure has been devolved to the Scottish Government. There are two steps to the adjustment:

1. An initial adjustment to the block grant is made for each tax and social security power. The adjustment is a deduction for each of the tax powers and an addition for each of the social security powers. This is to compensate the UK Government for the tax revenue which is now being retained by the Scottish Government and to recognise that the Scottish Government is now responsible for Social Security payments that were previously delivered by the UK Government. These adjustments ensure that neither government is automatically better or worse off as a direct result of devolution.
2. For each subsequent year the block grant adjustments (BGAs) for each tax are grown or "indexed" to take account of changing tax revenue and social security expenditure over time.

Indexing the BGAs

In the 2016 fiscal framework agreement, the UK and Scottish governments had differing views on which indexation mechanisms should be applied, with the Scottish Government preferring a mechanism that fully protects the Scottish Budget against the risk that population growth may not be the same in Scotland and the rest of the UK (rUK).

It was agreed that the BGAs for each tax and social security expenditure will be indexed in principle using the Comparable Model (CM) – but the actual funding implications would be calculated using the Scottish Government’s preferred option - the Indexed per Capita (IPC) model. It was agreed that this was not a permanent solution but something that will be looked at again in the next fiscal framework review.

As a result of the 2023 review, it was subsequently agreed that the BGAs will now be permanently indexed using the Scottish Government’s preferred methodology – the IPC model.

This means that if devolved Scottish tax revenues and social security expenditure per head grow at the same rate as in the rest of the UK, the Scottish Budget will be no better or worse off.

Reconciliations

At the Scottish Budget, tax and social security BGAs are initially based on forecasts created by the Scottish and rUK independent Fiscal Institutions – the Scottish Fiscal Commission (SFC) and the Office for Budget Responsibility (OBR). When tax and social security outturn data is published, there is then a reconciliation process to account for any forecast error.

For the fully devolved taxes (Land and Buildings Transaction Tax and Scottish Landfill Tax) and social security, an in-year reconciliation is applied to the budget and a final outturn reconciliation to the following budget. Income Tax only has a final reconciliation which is applied three years after the forecast is set, as a result of the time it takes to gather outturn data. Further information on the BGA reconciliation process can be found in the Technical Note.