Fiscal framework outturn report: 2021

1. Introduction

1.1 This is the fourth Fiscal Framework Outturn Report published by the Scottish Government. It forms part of a revised Budget process, as recommended by the final report of the Budget Process Review Group.

1.2 In keeping with the recommendations of the Group, it contains the following information:

• Outturn data for Scottish tax revenues and social security benefits (including comparison of outturn with forecast)
• Calculation of outturn Block Grant Adjustments (BGAs) and comparison with forecast
• Net effect on Budget (revenue/expenditure minus BGA) for each tax and social security benefit relative to forecast
• Implications of reconciliations for subsequent financial year
• Commentary on latest available interim outturn data on income tax
• Payments into the Reserve and withdrawals from the Reserve
• Balance of Scottish Reserve at the start and end of the previous financial year (with explanations for reasons for withdrawal or source of surplus)
• Borrowing undertaken during the past financial year, and assessment of how far Government remains below its various different borrowing limits
• Implications of borrowing in terms of estimated profile of future repayments.

1.3 The tax revenue and social security forecasts within this report have been drawn from the forecasts published by the Scottish Fiscal Commission (SFC) on 26 August 2021.

1.4 The forecasts of the BGAs are based on the Office for Budget Responsibility (OBR) forecasts of UK tax revenues and social security expenditure at the UK Budget on 3 March 2021. Since March the speed and effectiveness of the vaccine rollout, and the consequent easing of restrictions this has enabled, has meant that the economic outlook for both Scotland and the UK has improved significantly. Due to the timing differences between the SFC and OBR forecasts, and the significant difference in economic outlook embedded in them, comparisons of the latest available forecasts and BGAs should be interpreted with a large degree of caution.March 2021 OBR forecasts are, for example, likely to understate the BGAs and therefore overstate the likely Scottish Budget.

1.5 As a UK Budget had not been published at the time of the Scottish Budget 2021-22 in January, provisional BGAs were used to inform the Scottish Budget as directed under the Fiscal Framework.^[1] Updated BGAs were produced at the UK Budget 2021 in March 2021. However, the Cabinet Secretary for Finance and the Economy decided to use the provisional BGAs to inform the Scottish Budget. Where the latest BGA forecasts are referred to in this document, these are the updated BGAs produced at the UK Budget in March 2021.

1.6 Updated forecasts from the SFC will be published alongside the 2022-23 Scottish Budget. The OBR will publish its next set of forecasts on 27 October 2021, which will allow for the calculation of updated forecasts of BGAs.

1.7 As a result of changes to previous publication schedules, the majority of the outturn data used in this report is provisional. The 2020-21 outturn revenue and BGA data for Income Tax, Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT) are all provided on a provisional basis. The final LBTT and SLfT revenue data will be published as part of Revenue Scotland's Annual Reports and Accounts later in the year. HMRC outturn data, which is used to calculate the final BGAs for Income Tax, LBTT and SLfT, will also be available in due course. Provisional Scottish expenditure data is also used for 2020-21 Scottish Government Social Security expenditure and final data will be published as part of the Social Security Scotland Annual Report and Accounts in November. Provisional UK Government Social Security outturn data is also used to calculate the BGAs with final outturn being made available when the Local Authority, Parliamentary, and Country and Regional Tables 2020/21 are published later this year.

1.8 The following outturn data is therefore included in the report:

• Provisional BGA and revenue reconciliations for 2019-20 Scottish Income Tax;
• Provisional BGA reconciliations and revenue outturn for 2020-21 LBTT and SLfT;
• Provisional BGA reconciliations and expenditure outturn for 2020-21 Social Security expenditure, and;
• Final BGA reconciliation and provisional revenue outturn for 2020-21 Fines, Forfeitures and Fixed Penalties.

1.9 Due to the use of provisional data, the overall reconciliation applying to the 2022-23 Scottish Budget cannot be finalised at this point, but will be confirmed in the 2022-23 Scottish Budget document.

1.10 In summary, the following points are relevant for 2022-23 Budget considerations:

• The total provisional reconciliation required in the 2022-23 Budget will be a negative £14.8 million. This figure includes provisional reconciliations for 2019-20 Income Tax revenue and BGA, the provisional reconciliations of the BGAs for 2020-21 LBTT, SLfT and Social Security expenditure and the final BGA reconciliation for 2020-21 Fines, Forfeitures and Fixed Penalties.
• The residual balance on the reserve is £32 million based on 2021-22 drawdown plans. This is subject to change over the course of the financial year.
• Under current plans, the Scottish Government's capital debt will be £2.5 billion by the end of 2022-23, 82 per cent of its overall £3 billion limit.
• The Scottish Government plans to use its resource borrowing powers in 2021-22 to borrow £319 million.

Terminology used in this document

1.11 The Scottish Government must rely on forecasts when setting each Budget, and the UK Government also relies on forecasts when determining BGAs. When information about actual revenues and expenditure becomes available – known as 'outturn data' – subsequent Budgets are adjusted to account for the difference between forecast and outturn data. This process is known as a 'reconciliation' and can involve additions or reductions to Scotland's Block Grant.

1.12 Outturn figures are often first published on a provisional basis before a final figure is published. As this data becomes available for different taxes and social security benefits at different times, reconciliations are made throughout the Budget cycle. A full explanation of the reconciliation process, BGAs and the calculation of Scotland's Block Grant can be found in the Technical Note on the Fiscal Framework.^[2]